Fed Is Expected To Launch New Bond Buying Program
"The Fed really has only one key decision at the meeting, and that is how much of the current program will they replace," said David Jones, chief economist at DMJ Advisors.
If, on the other hand, the Fed chooses not to replace Twist with a new bond-buying program, the value of its long-term Treasury purchases will decline by half. Long-term borrowing rates might rise as a result.
When the Fed pumps more money into the financial system and adds to its portfolio, it's called quantitative easing, or QE. Critics argue that QE risks escalating inflation later. The Fed's portfolio totals nearly $2.9 trillion â¿¿ more than three times its size before the 2008 financial crisis.
The Fed has launched three rounds of QE since the financial crisis hit. In announcing QE3 in September, the Fed said it would keep buying mortgage bonds until the job market improved substantially. It also extended its plan to keep its benchmark short-term rate near zero through at least mid-2015. And it raised the possibility of taking other steps.Skeptics note that rates on mortgages and many other loans are already at or near all-time lows. So any further declines in rates engineered by the Fed might offer little economic benefit. But besides seeking to spur lending, the Fed's drive to cut rates has another goal: to induce investors to shift money out of low-yielding bonds and into stocks, which could lift stock prices. Stock gains boost wealth and typically lead individuals and businesses to spend and invest more. The economy would benefit. Inside and outside the Fed, a debate has raged over whether the Fed's actions have helped support the economy over the past four years, whether they will ignite inflation later and whether they should be extended. At this week's meeting, some regional Fed bank presidents will likely express concern that more bond buying will further flood the financial system with money and eventually send prices soaring.
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