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The Fed's purchases of securities have triggered criticism from some, including Republican presidential candidates. They argue that the central bank is fueling future inflation by steadily pumping more cash through the banking system. To make the bond purchases, the Fed essentially creates money. It then uses it to buy bonds to try to drive down their yields. The idea is for banks to lend at lower rates. But critics say the bond purchases have weakened the dollar's value. That makes foreign goods more expensive. And they say the purchases have forced up the prices of commodities such as oil and heightened the risks of asset bubbles. They note that the housing bubble was fueled by a previous period of prolonged low rates engineered by the Fed. To address such concerns, Reinhart said the Fed might consider making "sterilized" bond purchases. In doing so, it would buy more long-term bonds
-- but borrow the same amount it's spending. The Fed would borrow through short-term loans called repurchase agreements. This effort would be similar to the Fed's current "Operation Twist" program. Under this program, the Fed is buying $400 billion in long-term bonds while selling a similar amount in short-term holdings. That way, its balance sheet doesn't grow. The Fed has been forced to use unconventional means to support the economy because its principal tool, the federal funds rate, can't go any lower. The Fed's target for that rate has stayed at a record low between zero and 0.25 percent since December 2008. Mark Zandi, chief economist at Moody's Analytics, said he thinks the first rate increase will occur in early, rather than late, 2014. But he says the Fed won't likely signal any change in plans for at least another year. "We are still at least two years away from an actual Fed tightening of interest rates," Zandi said. "A lot can happen between now and then, and I think the Fed is doing exactly the right thing by keeping all of its options on the table."
[Associated
Press;
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