WASHINGTON — The Federal Reserve is poised to adopt a new plan to jolt the economy. It’s a high-stakes gamble that could shape Chairman Ben Bernanke’s legacy.
The Fed is all but certain to detail its plan for buying more government bonds when it wraps up its two-day meeting Wednesday. Those purchases should further lower interest rates on mortgages and other loans. Cheaper loans could lead people and companies to borrow and spend. That might help invigorate the economy, and lead companies to step up hiring.
Still, many question whether the Fed’s new plan will provide much benefit.
The Fed already has driven rates to super-low levels. And anticipation of the Fed’s new program has helped push down mortgage rates to their lowest points in decades. Yet the economy is still struggling.
The Fed has tried since the 2008 financial crisis to keep credit available to individuals and businesses. It’s done so, in part, by keeping the target range for its bank lending rate near zero.
It also pursued the unorthodox strategy of buying long-term bonds. The Fed’s purchases are so vast that they push down the rates on those bonds.
In 2009, the Fed bought $1.7 trillion in mortgage and Treasury bonds. Those purchases helped lower long-term rates on home and corporate loans. The program was credited with helping to lift the country out of recession.
The Fed’s aid program this time is likely to be no more than $500 billion.
A smaller program will also be less objectionable to some Fed officials. They fret that further lowering interest rates poses long-term risks, such as runaway inflation. There’s also the risk that the plan doesn’t work.
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