Fed is expected to launch new bond buying program

With a nervous eye on the "fiscal cliff", the Federal Reserve is expected this week to announce a new bond-buying plan to support the US economy.

The goal would be to further reduce long-term interest rates and encourage borrowing by companies and individuals. If it succeeds, the Fed might at least soften the blow from the so-called "fiscal cliff" -- the automatic tax increases and spending cuts that will kick in in January if Congress can't reach a budget deal with the White House.

But the Fed's actions wouldn't rescue the economy. Chairman Ben Bernanke warned last month that if the economy fell off a "broad fiscal cliff", the Fed probably couldn't offset the shock.

Fears of the cliff have led some US companies to delay expanding, investing and hiring. Manufacturing has reached its weakest point since July 2009. Consumers have cut back on spending. Unemployment has dipped in recent months but remains a still-high 7.7 per cent.

If higher taxes and government spending cuts lasted for much of 2013, most experts say the economy would sink into another recession.

Once its two-day policy meeting ends Wednesday, the Fed is likely to say it will start buying more long-term Treasurys to replace a program that expires at year's end. Under the expiring program, the Fed has sold short-term Treasurys and used the proceeds to buy $45 billion a month in long-term Treasurys. The plan is called "Operation Twist" because it has sought to "twist" long-term rates lower relative to short-term rates.

One advantage of Twist is that it hasn't increased the Fed's record-high investment portfolio. Critics say that when the Fed pumps more money into the financial system and adds to its portfolio, it risks escalating inflation later.

Unlike Twist, the Fed's new program would expand its portfolio, which totals nearly $2.9 trillion -- more than three times its size before the 2008 financial crisis. Most economists think the Fed will replace the $45 billion-a-month Twist program with a roughly equal amount of Treasury purchases each month.

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