Fed hinting at bond buy for next year

— The Federal Reserve will likely announce a new bond buying program in December to try to spur job growth, according to the record of the Fed’s October meeting.

The purchases would be intended to lower long-term borrowing rates to encourage spending and strengthen the economy. The hope is that more hiring would follow.

Minutes of the Fed’s Oct. 23-24 policy meeting released Wednesday suggest that it will unveil a Treasurybuying plan to replace the expiring “Operation Twist,” program, under which the Fed has been selling $45 billion a month in short-term Treasurys and using the proceeds to buy an equal amount of longer-term securities.

“A number of participants indicated that additional as- set purchases would likely be appropriate next year after the conclusion of the maturity-extension program,” according to the record of the October meeting.

When Operation Twist ends, the Fed will run out of short-term investments to sell. The minutes show support among the Fed’s policymakers to replace Twist with another program of long-term bond purchases.

A new bond-buying program would come on top of a program the Fed started in September. It began buying $40 billion a month in mortgage bonds to try to reduce long-term rates and make home buying more affordable. It was its third round of bond purchases.

The Fed also said in September that it planned to keep its benchmark short-term rate near zero through mid-2015. And it signaled a readiness to take other stimulative steps if hiring didn’t pick up.

The Fed reaffirmed that stance at its October policy meeting but took no new action. Officials decided to wait to see whether the aggressive steps they announced in September would help the economy.

In a statement after the October meeting, the Fed said that while the economy is improving moderately, job growth remained slow and the unemployment rate elevated. The rate is now 7.9 percent.

“We still have significant headwinds,” Sam Bullard, a senior economist at Wells Fargo & Co. in Charlotte, N.C., said Wednesday. “We’re looking at sluggish growth for the next two or three quarters, an employment market that remains challenged and businesses that see weak demand.”

Many analysts say the economy is growing this quarter at a weak annual rate below 2 percent — too slow to drive down unemployment. In part, that’s why the Fed will likely take further action at its final policy meeting of the year Dec. 11-12.

Operation Twist hasn’t expanded the Fed’s portfolio of bond holdings. It’s instead revamped the portfolio by shrinking the proportion made up of short-term investments and expanding the proportion made up of longer-term investments.

If the Fed launches a new bond-buying program, it would expand the portfolio.

Critics say the Fed’s programs are heightening the risk of high inflation. But Fed Chairman Ben Bernanke and his allies think the bigger risk would come from doing too little to help a persistently sluggish economy.

The minutes of the October meeting also show a detailed discussion about whether the central bank should link its policy of holding the main interest rate at zero to numerical measurements of unemployment and inflation, or continue the current approach of specifying a calendar date through which rates will remain low.

Fed Vice Chairman Janet Yellen and three other officials at the central bank have endorsed the strategy. The central bank pledged in September to hold the benchmark interest rate at a record low at least through mid-2015. Tying policy instead to an economic threshold would provide more clarity on the outlook for monetary policy, Yellen said Tuesday.

Information for this article was contributed by Jeff Kearns and Joshua Zumbrun of Bloomberg News.

Business, Pages 27 on 11/15/2012

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