WASHINGTON — With unemployment at 9.6 percent, the Federal Reserve is all but certain this week to launch a new program to try to fortify the economy. Yet the program isn’t expected to do much to ease a crisis that has left nearly 15 million people jobless.

Today, Chairman Ben Bernanke opens a two-day meeting where he will help craft a Fed plan to buy more government bonds. The idea is for those purchases to further drive down interest rates on mortgages and other loans. Cheaper loans might then lead people to spend more. The economy would benefit, and companies would step up hiring.

That’s the plan, anyway. But many question whether the Fed’s new plan will provide much benefit.

For one thing, the Fed already has driven rates to super-low levels. Yet the economy is still struggling.

The Fed has tried since the 2008 financial crisis to keep credit available to individuals and businesses. It has done so, in part, by keeping the target range for its bank lending rate near zero.

It also pursued the unorthodox strategy of buying long-term bonds. The Fed’s purchases are so vast that they push down the interest rates on those bonds.

In 2009, with the nation deep in recession, the Fed aggressively bought $1.7 trillion in mortgage and Treasury bonds. Those purchases helped lower long-term rates on home and corporate loans.

The Fed’s aid program this time is likely to be smaller — $300 billion to $500 billion — and more gradual. In part, that’s because the economy is in better shape now.

A smaller program will also be less objectionable to some Fed officials. They worry that further lowering interest rates poses long-term risks — namely runaway inflation.

But it’s a gamble.

A bond-buying program of about $500 billion would likely provide only a modest boost to growth in the current quarter of the year. Even with it, the unemployment rate is expected to stay above 9 percent.

Here’s how the plan would work: As the Fed buys Treasuries, the interest rates on those bonds will fall. It’s supply and demand: Higher demand for bonds lowers their rates, or yields. Rates on mortgages, corporate debt and other loans pegged to the Treasuries would drop, too.

More than a year after the recession ended, the economy has failed to generate a robust rebound. The economy did grow slightly faster last summer as Americans spent a bit more, the government said Friday. But it wasn’t nearly enough to lower unemployment.

The jobless rate stands at 9.6 percent. It has been at least 9.5 percent for 14 months.

The slack in the economy — factories running below capacity and companies limiting hiring — has kept inflation historically low. In the 12 months that ended in September, consumer prices rose just 1.1 percent.

Bernanke has said the Fed would like to see inflation closer to 2 percent to show the economy is making a solid recovery. He doesn’t want to see super-low inflation turn into deflation, a widespread drop in prices, wages and the values of homes and stocks.

The notion of letting inflation rise makes some Fed members queasy.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, and other inflation hawks argue that another round of Fed action could lead to too-high inflation and new speculative bubbles.

While Fed officials acknowledge that the risk of deflation is small, an outbreak could be devastating.

That’s another reason Bernanke wants to launch the new aid program. It would help blunt any deflationary trends.

Source: Statesman.com