Ben Bernanke
Alex Brandon  /  AP
Chairman of the Federal Reserve Ben Bernanke. The Fed is all but certain to maintain the pace of its Treasury bond-buying program.
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updated 1/26/2011 12:34:19 PM ET 2011-01-26T17:34:19

The Federal Reserve is all but certain Wednesday to maintain the pace of its Treasury bond-buying program because unemployment remains high and sinking home prices are eroding Americans' wealth.

Those and other risks, such as state and local government spending cuts, will likely cause the Fed to stick to its plan to buy $600 billion in Treasury bonds by the end of June. The bond purchases are intended to aid the economy by lowering interest rates, encouraging spending and raising stock prices.

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Ending a two-day meeting, the Fed policymakers will likely highlight improvements. Factories are producing more. Consumers are spending more. And businesses are hiring a bit more.

Story: Fed bond purchase plan now faces critics from within

At the same time, Chairman Ben Bernanke and his colleagues will likely note that the risks still justify continued bond purchases.

"The economy is growing at a faster clip, but there are a lot of potholes on the road to recovery," said economist Chris Rupkey at Bank of Tokyo-Mitsubishi. "The Fed will stay the course."

Two of the new voting members have been skeptical of the bond program. They've warned that the purchases could eventually trigger inflation by flooding the economy with billions of additional dollars.

Even so, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard Fisher, president of the Federal Reserve Bank of Dallas, aren't expected to dissent at Wednesday's meeting.

The Fed's main policymaking group now includes four regional bank presidents who are rotating onto the panel as voting members. Economists predict a show of unity.

"We expect no dissents," said economist Michael Feroli at JPMorgan Chase Bank.

Spring thaw?
That could change in the spring, when the Fed must decide whether to extend its bond purchases. Any push to renew the program beyond its scheduled June 30 end date would likely face stiffer resistance. Plosser and Fisher might even pressure Bernanke to scale back the program before June.

The Fed is also considered certain to repeat its pledge to hold interest rates at a record low near zero for an "extended period." To bolster the economy, the Fed has kept rates at ultra-low levels since December 2008.

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As the economy strengthens, Fisher and Plosser may prod the Fed to start raising rates. Holding rates too low for too long risks igniting inflation. But most economists predict the Fed won't start raising them until next year.

Bernanke pushed the bond-buying program because the economy was growing too slowly to make much dent in unemployment. Unemployment is now 9.4 percent. Even with stronger growth likely this year, the unemployment rate is expected to dip only slightly below 9 percent.

The Fed will probably repeat its concern that high unemployment could constrain consumer spending, which powers roughly 70 percent of U.S. economic activity.

Another restraint likely to be cited is the depressed housing market. Home prices fell in most of the biggest cities near the end of last year. Average prices in eight major metro areas have hit their lowest points since the housing bubble burst, according to a report Tuesday by Standard & Poor's/Case-Shiller.

Those falling prices are weighing on household wealth. For many people, their home is their biggest asset.

Minutes of the Fed's last meeting in December also revealed that policymakers are concerned that state and local governments, confronting budget shortfalls, may be forced to cut spending more deeply and lay off more people.

Bernanke has argued that the Fed can maintain its bond-buying program and hold rates at record lows because inflation isn't a threat, despite rising energy prices. Competitive pressures are restraining many companies from raising the prices they charge consumers.

Inflation "hawks" such as Fisher and Plosser are especially vigilant about price increases. They tend to be more concerned about the threat of high inflation than about the need to stimulate the economy.

The two other new voting members — Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, and Charles Evans, president of the Federal Reserve Bank of Chicago — have backed the Fed's bond-buying program.

Fed watchers think Kocherlakota, a first-time voting member, will lean toward hawkishness on inflation. Evans' reputation puts him among the "doves"— those concerned more about strengthening the economy than about warding off inflation.

The 11 members of the Fed's policymaking group — the Federal Open Market Committee — also will update their economic forecasts for this year. The projections will be released in mid-February. Growth is expected to strengthen. Unemployment is likely to stay high, around 9 percent.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Explainer: What is the the FOMC?

  • Image: Fed Chair Ben Bernanke
    Getty Images

    The Federal Reserve's chief policymaking group has vast power over the finances of ordinary people, businesses and investors. The consequences of its interest-rate decisions range wide: from people's ability to get affordable loans to the price of cereal at the grocery store or gasoline at the corner station.

    Here's a look at the policymaking group, called the Federal Open Market Committee.

  • What is the FOMC's primary role?

    Image: Employment Development Department office in San Jose, Calif.
    AP

    Its mission is to keep the economy, inflation and employment on a healthy track. When the economy weakens, Fed policymakers cut rates or keep them low. The idea is to cause people and businesses to borrow and spend more, which sustains the economy. But when the economy grows so fast that inflation becomes a threat, Fed policymakers will raise rates or keep them high. That makes it costlier for people to borrow. Spending and other economic activity will slow. Companies find it harder to raise prices. Inflation pressures ease.

  • How does the FOMC move interest rates?

    Image: TV shows rates unchanged
    AP

    Its policymakers decide whether to buy securities. Doing so expands the flow of money into the financial system and lowers the Fed's key interest rate. Conversely, the policymakers could decide to sell securities. That would drain money from the system and tighten credit by raising rates. The Federal Reserve Bank of New York is responsible for conducting these operations.

  • Who's on the committee?

    Image: Federal Reserve Board Governor Raskin
    Reuters

    It's composed of:

    • The Fed's Board of Governors in Washington, which now totals five members but at full strength has seven members.
    • The president of the Federal Reserve Bank of New York.
    • Four of the remaining 11 presidents of the Fed's regional banks. They serve one-year terms on a rotating basis.

    Here is Tuesday's roster of voting members: Fed Chairman Ben Bernanke, Vice Chairwoman Janet Yellen, and Fed Governors Elizabeth Duke, Daniel Tarullo and Sarah Bloom Raskin (pictured), all based in Washington; William Dudley, president of the Federal Reserve Bank of New York; Charles Evans, president of the Federal Reserve Bank of Chicago; Charles Plosser, president of the Federal Reserve Bank of Philadelphia; Richard Fisher, president of the Federal Reserve Bank of Dallas; and Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis.

    (President Barack Obama has nominated Peter Diamond to be a Fed governor, but the Senate hasn't confirmed him. Diamond, a professor at the Massachusetts Institute of Technology, shared the Nobel Prize in Economics in 2010. )

  • How often does the FOMC meet?

    Image: The Federal Reserve building
    Reuters

    It regularly meets eight times a year in person at the Fed's headquarters in Washington. During the financial crisis, the FOMC also held emergency meetings, mostly by video conference. This year, half the meetings were two-day sessions, the rest one-day. All the regularly scheduled meetings last year took two days. That was because the Fed needed time to devise unconventional programs to fight the financial crisis. Traditionally, one-day meetings are more common. Each one-day meeting runs roughly five hours. Two-day meetings run about eight hours spread over the two days.

  • Why are the FOMC's rate decisions issued around 2:15 p.m.?

    Image: Ben Bernanke on TV at NYSE
    AP

    Having a consistent time helps investors digest and react to the Fed's policy decisions. Issuing decisions when the markets are open gives Fed policymakers instant feedback from investors.

  • Why are some of the FOMC's rate decisions issued around 12:30 p.m.?

    Image: CNBC

    For the first time in the Fed's history, the chairman is conducting a series of regularly scheduled news conferences to discuss the Fed's forecast. Bernanke's first was held Wednesday. They will be held four times a year, after the Fed concludes its two-day meetings to update its economic forecasts on growth, employment and inflation. So, after those meetings, the FOMC's decisions are released earlier, around 12:30 p.m. Bernanke will then holds a news conference at 2:15 p.m. It's something that Bernanke's counterparts in Europe and Japan have done for years. The Fed is hoping the news conferences will improve its communications with Wall Street investors and the American public.

  • How are the FOMC's rate decisions approved?

    Image: Gavel
    Getty Images stock

    By a majority of the voting members, who now total nine. (At full strength, there would be 12.) That said, a close decision could spell trouble for the Fed chairman. It would suggest he can't win over policymakers to his side and could leave him weakened. Most votes are overwhelming, however, indicating that Fed chiefs are typically able to build consensus.

  • How are Fed officials selected?

    Image: President Barack Obama
    Reuters

    The president nominates the Fed chairman and his colleagues on the board of governors in Washington. They must be confirmed by the Senate. The presidents of the 12 regional Fed banks are appointed by each bank's board of directors, with approval from the Fed's board. A new law revamping financial regulation, however, bars bankers who sit on the regional boards from voting. Other local business people serving on the boards still retain their vote. This change was made to address concerns about potential conflicts of interest — having officials whose companies are overseen by the Fed in Washington picking the regional presidents.

  • How and why was the Fed created?

    Image: $100 bills
    Reuters

    Congress passed the Federal Reserve Act in 1913. The legislation was signed into law by President Woodrow Wilson on Dec. 23, 1913. The Fed began operating in 1914. It was created in response to a series of bank panics that plagued the United States during the 19th and early 20th centuries. Those panics led to bank failures and business bankruptcies that roiled the economy.

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