Fed to review $600B bond-buying program at meeting

After launching a much-criticized $600 billion bond-buying program last month to bolster the economy, the Federal Reserve is now taking stock of how it's working.

Fed Chairman Ben Bernanke and his colleagues will gather Tuesday for their last scheduled meeting of 2010, and no policy changes are expected.

Instead, Fed policymakers will examine the effectiveness of the unfolding program and discuss the implications of a tax-cut plan emerging from Congress.

Since the Fed announced its second round of stimulus on Nov. 3, stocks have risen. That's encouraging for the economy because larger stock portfolios make people, especially the wealthy, more inclined to spend.

On the other hand, rates on mortgages have risen, defying one of the Fed's stated goals of the bond-buying program. The average rate on a 30-year fixed mortgage has climbed to 4.61 percent. It's up sharply from 4.17 a month ago, the lowest rate in in some 40 years of recordkeeping.

The Fed's decision to buy $600 billion worth of government bonds by the end of June is intended to spur Americans to spend more, which would invigorate the economy.

Even supporters had cautioned that the benefits of the Fed's program would be modest. Even after the Fed unveiled it, Bernanke pressed Congress to intervene by providing the economy with stimulus. Bernanke warned that the Fed couldn't solve the economy's problems on its own.

Critics, from Republicans in Congress to some officials within the Fed, have also said they fear the Fed's intervention could spur inflation and speculative buying on Wall Street while doing little to energize the economy.

With the economy growing only slowly, unemployment soared to a seven-month high of 9.8 percent in November. The jobless rate has exceeded 9 percent for 19 straight months, the longest such stretch on record. It could pass 10 percent, as it did briefly in late 2009, again next year.

Persistently high unemployment was a main factor behind the Fed's decision to launch the bond-buying program.

The tax cut deal struck between President Barack Obama and Senate Republicans, however, is raising hopes for the economy. Economists say it will boost spending by individuals and businesses. That will strengthen growth and lead companies to hire more.

Key elements of the tax-cut plan include: extending 2001 and 2003 income tax cuts for two years; renewing long-term unemployment benefits for 13 more months; and reducing workers' Social Security taxes in 2011.

"The potential changes in fiscal policy will almost certainly be discussed at the meeting, but the statement will likely shy away from any mention of this contentious topic," said Michael Feroli, economist at JPMorgan Chase Bank.

When the Fed launched the $600 billion program, it held the door open to buying even more than $600 billion in bonds if the economy were to weaken. Or buying less if the economy grew more strongly than expected.

When the Fed intervenes to buy Treasury bonds, its purchases tend to drive down the bonds' yields. On the other hand, if it sells bonds or buys fewer, the yields could tick up.

In an interview on CBS' "60 Minutes," Bernanke said the Fed would regularly review the bond-purchase program. "This is not something that we've set into automatic motion going forward," he said.

Even with extra help flowing to the economy from the tax cuts, the Fed probably will stick to its plan, economists said. The tax cuts reduce pressure on the Fed to buy more bonds. But the prospects of high unemployment well into next year will keep the Fed from scaling back purchases, economists predicted.

Given concerns about high unemployment, the Fed will keep its key interest rate at a record low near zero and pledge again to hold it there for an "extended period."

Even with its second dose of stimulus, the Fed had projected the jobless rate could be as high as 9.1 percent next year and 8.2 percent in the 2012 presidential election year. Bernanke recently warned that it could take four or five more years for unemployment to fall to a historically normal 5 percent or 6 percent.