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Fed to review $600B bond-buying program at meeting

WASHINGTON (AP) - After launching a much-criticized $600 billion
bond-buying program last month to bolster the economy, the Federal
Reserve is now taking stock of how it's working.
Fed Chairman Ben Bernanke and his colleagues gathered Tuesday
morning for their last scheduled meeting of 2010, and no policy
changes are expected.
Instead, Fed policymakers will examine the effectiveness of the
unfolding program and discuss the implications of a tax-cut plan
emerging from Congress.
Since the Fed announced its second round of stimulus on Nov. 3,
stocks have risen. That's encouraging for the economy because
larger stock portfolios make people, especially the wealthy, more
inclined to spend.
On the other hand, rates on mortgages have risen, defying one of
the Fed's stated goals of the bond-buying program. The average rate
on a 30-year fixed mortgage has climbed to 4.61 percent. It's up
sharply from 4.17 a month ago, the lowest rate in some 40 years of
record keeping.
The Fed's decision to buy $600 billion worth of government bonds
by the end of June is intended to spur Americans to spend more,
which would invigorate the economy.
Even supporters had cautioned that the benefits of the Fed's
program would be modest. Even after the Fed unveiled it, Bernanke
pressed Congress to intervene by providing the economy with
stimulus. Bernanke warned that the Fed couldn't solve the economy's
problems on its own.
Critics, from Republicans in Congress to some officials within
the Fed, have also said they fear the Fed's intervention could spur
inflation and speculative buying on Wall Street while doing little
to energize the economy.
With the economy growing only slowly, unemployment soared to a
seven-month high of 9.8 percent in November. The jobless rate has
exceeded 9 percent for 19 straight months, the longest such stretch
on record. It could pass 10 percent, as it did briefly in late
2009, again next year.
Persistently high unemployment was a main factor behind the
Fed's decision to launch the bond-buying program.
The tax cut deal struck between President Barack Obama and
Senate Republicans, however, is raising hopes for the economy.
Economists say it will boost spending by individuals and
businesses. That will strengthen growth and lead companies to hire
more.
Key elements of the tax-cut plan include: extending 2001 and
2003 income tax cuts for two years; renewing long-term unemployment
benefits for 13 more months; and reducing workers' Social Security
taxes in 2011.
"The potential changes in fiscal policy will almost certainly
be discussed at the meeting, but the statement will likely shy away
from any mention of this contentious topic," said Michael Feroli,
economist at JPMorgan Chase Bank.
When the Fed launched the $600 billion program, it held the door
open to buying even more than $600 billion in bonds if the economy
were to weaken. Or buying less if the economy grew more strongly
than expected.
When the Fed intervenes to buy Treasury bonds, its purchases
tend to drive down the bonds' yields. On the other hand, if it
sells bonds or buys fewer, the yields could tick up.
In an interview on CBS' "60 Minutes," Bernanke said the Fed
would regularly review the bond-purchase program. "This is not
something that we've set into automatic motion going forward," he
said.
Even with extra help flowing to the economy from the tax cuts,
the Fed probably will stick to its plan, economists said. The tax
cuts reduce pressure on the Fed to buy more bonds. But the
prospects of high unemployment well into next year will keep the
Fed from scaling back purchases, economists predicted.
Given concerns about high unemployment, the Fed will keep its
key interest rate at a record low near zero and pledge again to
hold it there for an "extended period."
Even with its second dose of stimulus, the Fed had projected the
jobless rate could be as high as 9.1 percent next year and 8.2
percent in the 2012 presidential election year. Bernanke recently
warned that it could take four or five more years for unemployment
to fall to a historically normal 5 percent or 6 percent.

(Copyright 2010 by The Associated Press. All Rights Reserved.)


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