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Fed expected to take steps to help stimulate economy

WASHINGTON — Anticipation is high that the Federal Reserve will announce some new step today to try to rejuvenate the U.S. economy and boost investor confidence.

Just what that might be is unclear.

One option would be an effort to drive long-term interest rates even lower to try to spur borrowing and spending. A more modest step would be for the Fed to stress its readiness to do more should the economy weaken further. Or the Fed might do or promise nothing further — not for now, anyway.

Chairman Ben Bernanke and other Fed officials have acknowledged the slumping U.S. economy and the threats posed by Europe's debt crisis. Given that it can't cut short-term rates any further, the Fed has tried to further reduce long-term rates by buying more than $2 trillion in Treasury bonds and mortgage-backed securities. The idea is for those lower rates to help boost spending, hiring and economic growth.

Here's a look at the Fed's options, in order of their perceived likelihood:

EXTEND OPERATION TWIST: Under Operation Twist, the Fed has been gradually selling $400 billion in short-term Treasury securities since September and using the proceeds to buy longer-term Treasury bonds.

In doing so, the Fed seeks to "twist" long-term rates lower relative to short-term rates. Operation Twist has the advantage of potentially lowering long-term rates without expanding the Fed's record-high portfolio.

Operation Twist is set to expire at the end of the month. Many analysts say the Fed will announce it will continue to swap short-term securities it owns for longer-term securities for a few more months. But some think any new Operation Twist would be only about half the size of the expiring program.

Others note that even if Operation Twist did nudge long-term rates slightly lower, it probably wouldn't provide much benefit. Long-term U.S. rates have already touched record lows. Businesses and consumers who aren't borrowing now might not be moved to do so if rates slipped a bit more.

QEIII: When the Fed expands its portfolio by buying more bonds, it's called quantitative easing, or QE. It's already engaged in two rounds of QE totaling more than $2 trillion. A possible third round has been dubbed QEIII.

This would be the most dramatic move the Fed could make to try to further drive down long-term rates. It would also trigger the most criticism because it would expand the Fed's holdings by billions more dollars.

Republican presidential candidate Mitt Romney said on CBS's Face the Nation on Sunday that another round of Fed bond purchases would "put in question the future value of the dollar and it will obviously encourage inflation down the road."

Supporters of further bond purchases counter that last week's news that consumer prices fell in May by the most since late 2008 showed that inflation is hardly a threat. Rather, they argue, the most urgent problems are the job market and the economy, which continue to struggle.

More bond purchases, if they did help lower rates, could also lift the stock market if they led many investors to shift money out of low-yielding bonds into stocks.

STRONGER LANGUAGE: Un-­ der this option, the Fed would change the wording of the statement it issues after each meeting. It could do so in two ways. It could be more definitive in pledging to help should the economy weaken further and perhaps spell out what those steps could be.

DO NOTHING: This would represent a continuation of the Fed's decisions at its policy meetings in March and April. After each of those meetings, it kept its policy-making on hold.

A no-change meeting would risk disappointing investors and triggering a selloff on Wall Street. That, in turn, could further dampen consumer and business confidence.

That isn't the outcome the Fed would like to see.

Job openings plunge

U.S. employers in April posted the fewest job openings in five months, suggesting that hiring will remain sluggish in the months ahead. The Labor Department said Tuesday that job openings fell to a seasonally adjusted 3.4 million in April, down from 3.7 million in March. The March figure was the highest in nearly four years. There were 12.5 million unemployed people in April. That means there was an average of 3.7 people competing for each open job. In a healthy job market, the ratio is usually about 2 to 1.

Fed expected to take steps to help stimulate economy 06/19/12 [Last modified: Tuesday, June 19, 2012 8:43pm]
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