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Fed to announce bond-buying plan to increase borrowing, spending

Ben Bernanke

The Federal Reserve is expected to announce a bond-buying scheme on Wednesday designed to keep down long-term interest rates and encourage American businesses and consumers to borrow and spend.

If the Fed’s plan works, it could reduce the aftershocks of tax increases and spending cuts scheduled to take effect in January if Congress is unable to reach a deal on the budget. Ben Bernanke, the chairman of the Fed, said that the plan probably would not rescue the economy if it took a dive off of the looming fiscal cliff, according to The Huffington Post.

Fears regarding the fiscal cliff have led some firms to delay their expansion, recruitment efforts and investments. Manufacturing has decreased and consumers have reduced their spending. Unemployment remains at 7.7 percent, and many experts maintain that the economy would fall into another recession if the higher taxes and spending cuts lasted for a majority of 2013.

The Fed is expected to unveil a program to purchase $45 billion a month in long-term Treasury securities, replacing a program called Operation Twist, in which the Fed sold $45 billion a month in short-term Treasuries and used the proceeds to purchase the same amount in long-term Treasuries, The Huffington Post reports.

Since the Fed has sold off all of its short-term securities, it must increase spending and beef up its portfolio in order to maintain its pace of long-term Treasury security purchases. The plan expected to be announced on Wednesday would join a plan announced in September, in which the Fed purchases $40 billion a month in mortgage bonds in order to force home mortgage rates even lower and to encourage home purchases.

“The Fed really has only one key decision at the meeting, and that is how much of the current plan they will replace,” David Jones, the chief economist at DMJ Advisors, said, according to The Huffington Post.

If the Fed chooses not to replace Operation Twist, the value of its long-term Treasury securities will decrease by 50 percent, which could increase long-term borrowing rates.

In addition to increasing lending by driving down rates, the Fed hopes to encourage investors to move funds out of low-yielding bonds and into stocks to boost the stock market, which could, in turn, further increase spending and investing, The Huffington Post reports.