Markets await Federal Reserve moves

The US Federal Reserve is running out of options to try to boost a slumping economy and lower unemployment.

The US Federal Reserve is running out of options to try to boost a slumping economy and lower unemployment.

So policymakers are expected to reach 50 years back into their playbook for their next move.

Most economists expect the Fed to announce a plan today to shift money in its 1.7 trillion US dollar portfolio out of short-term securities and into longer-term holdings.

The plan could lower Treasury yields further. Ultimately, it could reduce rates on mortgages and other consumer and business loans, too.

Fed chairman Ben Bernanke is expected to advocate the move despite criticism from within the Fed and from Republican politicians and presidential candidates.

On Monday, the four highest-ranking Republicans in Congress sent Mr Bernanke a letter cautioning the Fed against taking further steps to lower interest rates. Their letter suggested that lower rates could escalate the risk of high inflation.

The plan the Fed is considered most likely to unveil today has been dubbed Operation Twist and dates to the early 1960s. The Fed used a similar programme then to “twist” long-term rates lower relative to short-term rates.

Expectations that the Fed will do so again, along with renewed fears of another recession, have led investors to buy up US Treasurys. Treasury yields have dropped in response.

The yield on the 10-year Treasury note last week touched a historic low of 1.87%. Yesterday, it finished slightly higher, 1.93%.

Once the Fed announced last month that it would expand its September meeting from one to two days, most economists have predicted that policymakers would unveil some new step.

Mr Bernanke has said that the Fed is considering a range of options.

The central bank is under pressure to revive an economy that has limped along for more than two years since the recession officially ended.

In the first six months of this year, the economy grew at an annual rate of just 0.7%. In August, the economy did not add any jobs, and consumers did not increase their spending on retail goods.

Most economists foresee growth of less than 2% for the entire year. Many say the odds of another recession are about one in three.

The Fed has offered its own bleak outlook. At its August meeting, it said the economy will likely struggle for at least two more years. As a result, it said it planned to keep short-term rates near record lows until mid-2013, as long as the economy remained weak.

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