Fed may stretch purchases of government debt
Seeks to avert stimulus overdose
WASHINGTON - With unemployment likely to hit double digits this year, the Federal Reserve must strike a reassuring message this week: That it stands ready to take further steps to nurse the economy back to health, but also make clear that too much medicine could spur worries about inflation later on.
Some economists say that at the end of their two-day meeting tomorrow, Fed chairman Ben Bernanke and his colleagues may stretch their purchases of government debt to avoid an abrupt end to that effort, now slated for August. That could help avert possible market disruptions and ease fears about triggering inflation.
“I think there’s a good chance the Fed will exert more flexibility in the timing of purchases to slow them down,’’ said Michael Feroli, an economist at JPMorgan Economics.
In March, the Fed launched a bold $1.2 trillion effort to drive down rates on mortgages and other consumer debt, to try to revive lending and get Americans to spend freely again. It said it would spend up to $300 billion to buy long-term government bonds in the next six months and boost its purchases of mortgage securities. So far, the Fed has bought about $177.5 billion in Treasury bonds.
Some analysts said the Fed might opt to slow its purchases of mortgage-backed securities. The Fed is on track to buy up to $1.25 trillion worth of securities issued by Fannie Mae and Freddie Mac by the end of this year or early next year. Its recent purchases have averaged $455.3 billion.
Feroli said the Fed might change the mix of the government and mortgage-backed securities it’s buying to limit any unintended effects on prices and trading.
“The Fed’s action on the mortgage side is having an adverse impact on liquidity,’’ he said. “Not a lot is being traded because the Fed is buying up anything that hits the market and holding it.’’
What’s all but certain is that Fed policymakers will hold a key lending rate to banks at a record low near zero. They also are likely to repeat a pledge to keep rates there for “an extended period.’’
Most economists say that means the Fed will keep the target range for its bank lending rate between zero and 0.25 percent through this year and into next year to help brace the economy. That means commercial banks’ prime lending rate, used to peg rates on home equity loans, certain credit cards, and other consumer loans, will stay around 3.25 percent.