Fed action to spur economy expected


WASHINGTON — As the Federal Reserve prepares to take what is expected to be new action to stimulate the economy this week, divisions at the central bank may be undermining its efforts to speed up economic growth and lower unemployment.

After the Fed concludes its policymaking meeting Thursday, the central bank is all but certain to extend its plan to keep interest rates low, moving the possible cutoff to 2015 from 2014. Many economists also expect the Fed to launch a bond-buying program targeting the mortgage market.

The guidance on interest rates is supposed to encourage businesses and consumers to invest and spend, stimulating the economy, while the bond purchases are designed to further lower interest rates.

But disagreements within the Fed risk muddying the central bank’s message, a problem that many economists say could make its efforts ineffectual and possibly counterproductive.

The economists note that the Fed plans to keep interest rates low for an extended period only because it believes the economy will be weak until then.

This approach not only may make consumers and businesses fear a long period of economic malaise, but also suggests that the Fed will start to raise rates if the economy shows signs of recovery.

“You are changing expectations in a way that makes people even more reluctant about how they’re going to spend,” said Michael Woodford of Columbia University, who recently wrote a major paper on the subject. “That’s a large part of the problem with the economy — a lot of people are saying, ‘We should wait and see.’”

The Fed is led by Chairman Ben S. Bernanke and six governors, based in Washington, and the 12 presidents of regional Federal Reserve banks across the country.

The members have openly clashed over whether the weak economy needs significantly more stimulus, or whether additional actions by the Fed could set off a difficult-to-control bout of inflation.


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