Fed begins policy meeting

Tue Sep 20, 2011 11:50am EDT
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WASHINGTON (Reuters) - The U.S. Federal Reserve opened a two-day meeting on Tuesday that is expected to end with a decision to stock up on longer-term Treasury notes in a bid to boost a fading economic recovery.

With economic prospects fading dramatically after a damaging U.S. debt downgrade in August and an escalation of European financial turmoil, the Fed has made clear it is intent on taking further steps to lift growth.

Although officials at the central bank differ on how best to address the economy's woes, analysts expect Fed Chairman Ben Bernanke to muster a consensus behind a plan to rebalance the Fed's portfolio to push down longer-term interest rates.

Officials hope that by weighting the central bank's bond holdings more heavily toward longer-term debt they can spur mortgage refinancings and push investors into stocks or corporate bonds and away from safe-haven Treasuries.

The Fed is expected to announce its decision at about 2:15 p.m.ET on Wednesday.

Analysts say that faced with a still-growing economy and inflation that is not far below target levels, U.S. central bank officials are preparing a series of measured easing steps but will stop short of an aggressive move like a renewed outright expansion of its balance sheet.

"These are tinkering measures, not the financial bazooka, so to speak," said Carl Riccadonna, senior U.S. economist for Deutsche Bank in New York. "If we get to a period where the employment numbers turn negative -- then I think there will be much more agreement on the Open Market Committee that they will have to do something bolder. We're certainly not there yet."

Another modest loosening step some economists believe the Fed could take on Wednesday would be to trim the rate the Fed pays banks for excess reserves parked at the central bank from the current 0.25 percent level. Such a move could make it more attractive for banks to loan money, which could spur the economy.

The U.S. central bank cut overnight interest rates to near zero in December 2008 and then bought $2.3 trillion in longer-term bonds to help the struggling economy.   Continued...

<p>U.S. Federal Reserve Chairman Ben Bernanke makes remarks at the start of a conference on systemic risk, at the Federal Reserve in Washington September 15, 2011. REUTERS/Jonathan Ernst</p>