WASHINGTON - Faced with a wide range of signs warning of an economic slowdown, the Federal Reserve is expected to announce Wednesday that it will extend a controversial bond-buying program, even though there's evidence that it isn't always helping the Americans who most need assistance.
The rate-setting Federal Open Market Committee is expected to leave its benchmark interest rates unchanged but announce the extension of Operation Twist, a $400 billion bond-buying program set to expire at month's end, which involves swapping U.S. government bonds that had a short maturity for those with a longer maturity.
The idea behind Operation Twist was to drive down the interest rate on long-term bonds, which serve as a reference in the pricing of auto loans, mortgages and other longer-term loans to consumers and business.
Fed governors have been divided over intervening further in the bond markets, not sure that the economy was weak enough to require it. But data ranging from consumer sentiment to industrial production to hiring now point clearly to a deceleration of growth.
Faced with coming elections and ongoing problems in Europe, the Fed is under pressure to act now, before things get worse and before its actions inadvertently can become part of the political debate ahead of November's presidential election.
U.S. stocks rallied Wednesday on the expectation of Fed action to spark economic activity. The Dow Jones industrial average closed up almost 96 points to 12,837, while the S&P 500 index rose by 13 points to 1,358.
Financial firms were anticipating another shot of economic caffeine from the Fed beyond the Twist extension. The Securities Industry and Financial Markets Association, the lobby for big Wall Street banks, predicted a slowdown to an annualized growth rate of just 2.1 percent this year and next in its midyear economic outlook released Tuesday.
The outlook included a survey of members, which found that 65 percent of the bankers who were interviewed expected the Fed to engage in more quantitative easing. That's the term for purchasing bonds to drive down interest rates and spur economic activity.
Still, the Fed's bond-buying efforts are controversial because they now account for $2.3 trillion of the assets on the Fed's $2.8 trillion balance sheet. Some economists fear that the Fed will ultimately spark inflation when the economy does get back to normalcy.
How much Americans could gain from any further bond-buying is unclear. Even with the unusually low lending rates, banks have proved reluctant to lend -- and, to a lesser extent, consumers are reluctant to borrow.