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Fed expects burst of economic relief as risks to long term recovery loom

Jaclyn Giovis Jan 4, 2011

Federal Reserve officials are expecting some economic relief this year from the recent tax cut deal between President Barack Obama and Republicans in Congress, but it’s not going to be enough to fix the biggest threats to the nation’s recovery, according to minutes released today of the Fed’s Dec. 14 closed-door meeting.

The threats to progress are no surprise, of course – weak hiring activity, cuts and layoffs from state and local governments, and a shaky housing market. The question is: What will the Fed do next?

The measured tone of the Fed’s minutes offers some hints that the central bank will stay its course. The Fed stuck with the pace of their $600 billion Treasury bond-buying program last month, because the economic situation wasn’t improving fast enough to lift unemployment.

“Even with the positive news received over the intermeeting period, the most likely outcome was a gradual pickup in growth with slow progress toward maximum employment,” the minutes said.

Some analysts say there’s no reason to believe the Fed’s going to change course on its policy, called quantitative easing.

“There is no indication that members are inclined to curtail the program,” Eric Green, chief economist at TD Securities, told Reuters. “The Fed will follow through with the $600 billion.”

It’s not exactly “printing money,” but the Fed’s decision to inject new money into the U.S. economy by purchasing $600 billion in long term government bonds has raised concerns here and abroad.

Bond purchases are important to economic activity – they can force interest rates down on mortgages and other loans like on cars. The Fed’s strategy, called quantitative easing, suggests that would create growth for businesses and entice them to start hiring.

Some policy makers have expressed concern that the policy could create deflation. But those fears appear to have subsided. In the minutes, Fed officials expressed confidence that the recent rise in government bond yields was a consequence of greater optimism about the economy, and would not undermine its efforts to stimulate the recovery by keeping long-term interest rates low.

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