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Federal Reserve expected to act, again, to rev up the economy


The Federal Reserve is expected to announce a controversial policy today to buy billions of dollars in government bonds in an attempt to breathe new life into the struggling U.S. economy, Reuters reported.

The decision would be aimed at lowering borrowing costs further for consumers and businesses that are still suffering from the worst recession since the Great Depression, though there are doubts about its effectiveness.

With the U.S. economy expanding at a tepid 2 percent annual pace in the third quarter and the jobless rate seemingly stuck around 9.6 percent, the Federal Reserve has come under pressure to do more to stimulate business activity.

Economists expect a new round of U.S. Treasury purchases to total about $500 billion over a six-month period, a policy called quantitative easing. The move is likely to be accompanied by a signal that officials, who have been divided over the wisdom of the move, might ramp up the operation if needed.

The Federal Reserve cut overnight interest rates to near zero in December 2008 and has already bought about $1.7 trillion in U.S. government debt and mortgage-linked bonds.

“The Federal Reserve’s proposed policy of quantitative easing is a dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilize the global economy,” Harvard University economist Martin Feldstein said in a column published today in the Financial Times.

Many supporters of quantitative easing say it is important for the Federal Reserve to be seen as doing something rather than doing nothing, MarketWatch.com said.

“Think of the Fed as a group of soldiers in a foxhole. They have fired their bazooka and their rifle ammunition by cutting rates to zero, and now they are using their pistols,” said Ethan Harris, chief North American economist at Bank of America Merrill Lynch.

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