Fed continues to back $600b Treasury bond-buying program

By Jeannine Aversa
Associated Press / January 27, 2011

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WASHINGTON — The economy isn’t growing fast enough to lower unemployment and still needs help from the Federal Reserve’s $600 billion Treasury bond-purchase program.

That was the assessment yesterday of Fed policy makers as they ended their first meeting of the year. The Fed made no changes to the program, and the decision was unanimous.

The decision came from a new lineup of voting members that includes two officials who have criticized the bond purchases. They have said the purchases could eventually ignite inflation or speculative buying in assets such as stocks.

The bond-buying program is intended to lower rates on loans and boost stock prices, spurring more spending and invigorating the economy. Chairman Ben Bernanke faces the challenge of trying to boost hiring and growth without creating new economic threats.

The tax-cut package that took effect this month is easing pressure on the Fed to stimulate growth through its bond purchases. The measure renewed income tax cuts and cut workers’ Social Security taxes, boosting their take-home pay.

The Fed’s assessment of the economy was nearly identical at its last meeting in December. Fed policy makers seemed to downplay recent improvements in the economy, including stronger spending by consumers and more production at factories.

Instead, the Fed noted that the economy continues to face risks. The biggest: that high unemployment will damp consumer spending, which accounts for 70 percent of national economic activity.

The Fed also noted a recent increase in the prices of commodities, such as oil and gasoline, but said it isn’t likely to spark high inflation. The prospect that inflation will remain tame gives the Fed leeway to stick with its program to buy $600 billion worth of Treasury debt by the end of June.

The Fed kept its pledge to hold a key interest rate at a record low near zero for an “extended period.’’ The Fed has kept rates at ultra-low levels since December 2008 to try to encourage people and businesses to spend.

The Fed’s show of unity could erode by spring. At its next meeting, March 15, or the following one in April, the Fed will probably want to signal whether it will end the bond program on schedule or extend it. Any push to renew the program would likely face stiffer resistance.

Charles Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard Fisher, president of the Federal Reserve Bank of Dallas, have spoken out against the program as a threat to trigger high inflation. Plosser and Fisher might even pressure Bernanke to scale back the program before June.