Business

Sep 12, 2012 11:07 AM by Lauren Molenburg

Expectations high for major Fed action Thursday

WASHINGTON (AP) -- If the world's investors are right, the Federal Reserve is about to take a bold new step to try to invigorate the U.S. economy.

And many expect the Fed to unleash its most potent weapon: a third round of bond purchases meant to ease long-term interest rates and spur borrowing and spending. It's called "quantitative easing," or QE.

Others foresee a more measured response when the Fed ends a two-day policy meeting Thursday. They think it will extend its timetable for any rise in record-low short-term rates beyond the current target of late 2014 at the earliest.

On one point few disagree: The Fed feels driven to act now because the U.S. economy is still growing too slowly to reduce high unemployment. The unemployment rate has topped 8 percent every month since the Great Recession officially ended more than three years ago.

In August, job growth slowed sharply. The unemployment rate did fall to 8.1 percent from 8.3 percent. But that was because many Americans stopped looking for work, so they were no longer counted as unemployed.

Chronic high unemployment was a theme Fed Chairman Ben Bernanke spotlighted in a speech to an economic conference in Jackson Hole, Wyo., late last month. Bernanke argued that QE and other unorthodox Fed actions had helped ease borrowing costs and boosted stock prices.

Higher stock prices increase Americans' wealth and confidence and typically lead individuals and businesses to spend more.

In his speech, Bernanke cited research showing that the two previous rounds of QE had created 2 million jobs and accelerated economic growth. Still, he said persistently weak hiring remains "a grave concern" that inflicts "enormous suffering."

His remarks sent a clear signal that the Fed will do more.

"He had a sense of urgency in that Jackson Hole speech," said David Jones, chief economist at DMJ Advisors. "I think he is convinced that there is a need to do something."

If the Fed takes the more modest step Thursday of extending its timetable for any rate increase, many analysts think it would push its target date to mid-2015. The goal would be to lower borrowing rates by assuring investors that short-term rates will likely stay near zero even longer than previously thought.

Yet Bernanke's remarks in Jackson Hole about unemployment were so downbeat, and his defense of Fed bond purchases so strong, that many economists suspect a bond-buying program will be unveiled Thursday.

(Copyright 2012 The Associated Press. All rights reserved.)

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