The US Federal Reserve is expected to announce a controversial new policy today to buy billions of dollars in government bonds in an attempt to breathe new life into the struggling US economy.
The decision would be aimed at pushing down borrowing costs for consumers and businesses still smarting from the worst recession since the Great Depression, though there are doubts about its effectiveness.
With the US economy expanding at only a 2 per cent annual pace in the third quarter and the jobless rate seemingly stuck around 9.6 per cent, the Fed has come under pressure to do more to stimulate business activity.
Economists expect a new round of Treasury purchases to total about $500 billion over a six-month period and to be accompanied by a signal that officials, who have been divided over the wisdom of the move, might ramp up the operation if needed.
"We expect the statement will express a willingness - but not necessarily a bias - to further increase asset purchases if warranted by economic conditions," said Michael Feroli, chief US economist at JPMorgan in New York.
The Fed is expected to announce its decision at around 7.15pm Irish time.
Markets have already seen sharp moves in anticipation of the Fed's expected resumption of bond purchases, which were first undertaken as a response to the financial crisis of 2007-2009. US stocks and government bonds have rallied, while the dollar has taken a drubbing in advance of the decision.
Stocks have also been supported by expectations - now validated - that Republicans, viewed as more pro-business by investors, would seize control of the House of Representatives and pick up Senate seats in elections on yesterday that were largely cast as a referendum on the economy.
As Republicans campaigned on a smaller government platform, Congress may be less likely to offer fresh stimulus spending if the economy sputters, leaving the Fed as the primary source of support.
The Fed cut overnight interest rates to near zero in December 2008 and has already bought about $1.7 trillion in US government debt and mortgage-linked bonds.
With the prospect of a long period of ultra-low returns in the United States, investors have flocked to emerging markets, pushing those currencies higher. Emerging economies, worried about a loss of export competitiveness, have cried foul.
"We are all under attack by the relaxed monetary policy of the United States," Colombian Finance Minister Juan Carlos Echeverry told investors yesterday.
The Bank of Japan, which meets tomorrow and Friday, is also poised to launch a new round of bond buying. The European Central Bank and Bank of England also meet this week, but are not expected to make any changes to policy for the time being.
Reuters