The US Federal Reserve is weighing a new bond-buying program to boost the US economy that is designed not to add to inflationary pressures, the Wall Street Journal (WSJ) reported on Wednesday.
The US central bank’s possible new approach to stimulus would involve creating fresh money to buy Treasury bonds and long-term mortgage securities, as it has done in previous quantitative easing or “QE” programs, the newspaper said.
However, rather than leaving that new money in the market as before, it would then borrow it back in short-term arrangements, limiting its impact on overall liquidity in the financial system.
The program, called a “sterilized QE,” would aim as before to further pull down long-term interest rates or, if the buying involves mortgage securities, to press down home-loan interest rates to boost the moribund property sector.
Still uncertain about the direction of the economy, the Fed is not expected to embark on such a policy in the immediate future, reserving it only if it perceives further weakness, the Journal said.
“If growth or inflation pick up much, officials seem unlikely to launch a bond-buying program because the economy might not need the extra help or because doing more could spur higher inflation,” the Journal said.
Fed Chairman Ben Bernanke told Congress last week that the central bank saw the economy growing this year at around a middling 2.25 percent rate, while inflation will remain subdued.
However, if it does deploy the strategy, the Fed wants to assuage those worried about the possible return of high inflation after three years of its efforts to boost growth through QE-type liquidity injections.
The US$600 billion QE2 bond buying program launched in November 2010 came as global food and other commodity prices began rising and the Fed’s easy-money policy was blamed for that burst of inflationary pressure.
The Fed said market supply and demand forces were the main reason for the higher prices.
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