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Federal Reserve Meets, Unlikely to Change Policy Course

This morning, members of the Federal Open Market Committee are meeting to discuss the country’s monetary policy. They are expected to release a report at 2:15 p.m. reiterating the troubles in the economy and stating the Federal Reserve will keep interest rates near zero for an “extended period.” But with the recovery stalling out, unemployment high, prices on the verge of deflation and some talk of a double dip, many are hoping the central bank might do more.

Economists such as Paul Krugman have recommended aggressive policy maneuvers to bring down unemployment and aid the recovery. Ben Bernanke, the head of the Federal Reserve, himself has said the central bank might consider less conventional policies. The Fed could raise the inflation target. It could make additional asset purchases. It could make harder statements about its commitment to recovery. It could pay banks less to keep money at the central bank.

At The Washington Post, Neil Irwin describes the likeliest measures:

One substantive option on the table — and which has the highest likelihood of actually being taken, though it is no sure thing — would be to state that the Fed will maintain the current size of its balance sheet, $2.3 trillion, by buying new assets as the mortgage backed securities in its portfolio mature. That would have only a moderate impact in terms of increasing the money supply, but would be a signal that the Fed has entered a more dovish mode.

Similarly, the Fed could strengthen its statement that economic conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” One fairly significant change would be to state how long an “extended period” is, such as two or three years. Another aggressive change would be to state that low interest rates are likely to be warranted until certain economic conditions are met, such at an 8 percent unemployment rate and core inflation above 2 percent.

Another possibility would be to cut the interest rate on excess reserves that banks park at the central bank, currently 0.25 percent, to zero.

Still, most expect the Fed to do nothing — despite the slow recovery. For good additional background, here is a piece by Reuters.

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