Fed set to expand its monetary stimulus

Wed Dec 12, 2012 12:03am EST
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By Pedro Nicolaci da Costa

WASHINGTON (Reuters) - The Federal Reserve is expected to announce a fresh round of bond buying on Wednesday as part of its efforts to support a fragile economic recovery threatened by political wrangling over the government's budget.

The central bank looks certain both to extend its purchases of mortgage-backed debt and replace another expiring stimulus program with a new bout of money creation.

Policymakers are also likely to repeat a pledge to keep buying bonds until the labor market outlook improves substantially. A drop in the jobless rate to 7.7 percent in November from 7.9 percent in October was driven by workers exiting the labor force, a fact certain to disappoint the Fed.

"The economic environment seems ripe for those at the Fed who support continued accommodation," said Victor Li, professor at the Villanova School of Business and a former St. Louis Fed economist.

As its last program of Treasury purchases, known as Operation Twist, draws to a close, officials look set to replace it with a fresh $45 billion per month in buying. Unlike those in Twist, which were funded by sales and redemptions of short-term debt, the new Treasury purchases will further expand the Fed's $2.8 trillion balance sheet.

Economists also expect the central bank to continue buying $40 billion per month in mortgage-backed securities as announced in September, keeping the monthly pace of total asset purchases at $85 billion -- a figure the Fed highlighted in its last policy statement.

"We want to see continued improvement in labor markets in the near term, and monetary policy should encourage faster economic growth to achieve that objective," Eric Rosengren, the dovish president of the Boston Federal Reserve Bank, said last week.

The central bank will announce its decision around 12:30 p.m. (1730 GMT), and Fed Chairman Ben Bernanke will discuss it at a news conference at 2:15 p.m. (1915 GMT).   Continued...

Federal Reserve Chairman Ben Bernanke speaks to the Economic Club of New York in New York, November 20, 2012. REUTERS/Brendan McDermid