Federal Reserve’s plan met with skepticism

WASHINGTON – The Federal Reserve begins a two-day meeting today that’s expected to conclude with announcement of an unorthodox plan to spark life into the moribund U.S. economy.

• The plan: The Fed has signaled since August that it’ll begin purchasing government bonds in an attempt to drive down the bonds’ yield, or their return to investors. It hopes that by flattening the return that investors can get from the safest investments, they’ll take more risks and lift the economy out of its doldrums.

• Anticipated effect: The dollar is expected to weaken as a result of the Fed’s purchase of two-year and 10-year Treasury bonds. That’ll boost the U.S. economy by making U.S. exports cheaper abroad. The action also is expected to compel similar steps by the British, European Union and Japanese central banks later this week. The risk is that all the new pump-priming may end up igniting inflation down the road.

• Opinions: There’s considerable skepticism about whether the unorthodox step, called quantitative easing, will work. Many analysts fear it sets the stage for revived inflation, the rise in prices across the economy. Some experts worry that the Fed may not be able to rein in inflation once it reignites, or may face pressure from politicians to tolerate higher inflation rather than dial it back as the economy recovers. That’s why Federal Reserve Bank of Kansas City President Thomas Hoenig warns that the Fed’s expected action is “a pact with the devil.”