Fed plan to buy Treasury bonds to provide short-term fix carries long-term risks

By Jeannine Aversa, The Associated Press

WASHINGTON - U.S. Federal Reserve chairman Ben Bernanke is balancing a short-term fix for the economy with a long-term gamble: His plan to buy Treasury bonds to fight high unemployment and super-low inflation now could ignite inflation later.

But Bernanke is signalling that doing nothing would pose the biggest risk of all.

The Fed chief on Friday made his strongest case yet for injecting billions more dollars into the economy. Purchasing the bonds could further drive down rates on mortgages, corporate debt and other loans.

Lower rates could lead people and companies to borrow and spend. And higher spending might help ease unemployment and invigorate the economy.

The Treasury purchases would have another aim, too: to dispel any notion that consumer prices will stay flat and might even fall. In his speech Friday in Boston, Bernanke indicated that Fed policy-makers favour raising inflation, which has all but vanished.

And more inflation could help the economy. Here's how:

Companies would feel more inclined to increase prices. And shoppers who thought prices were headed up would be more likely to buy now rather than wait. Their higher spending could embolden employers to step up hiring. It would also help lift inflation. (more)