Federal Reserve to print billions of dollars in massive shadow stimulus

The Federal Reserve's policy-setting panel began a crucial two-day meeting Tuesday, poised to cast aside its long-held reluctance to micro-manage the economy in a bid to avoid a lost decade of growth.

The central bank's open market committee (FOMC) is expected to approve massive stimulus spending not seen since the depths of the economic crisis.

At the conclusion of the meeting Wednesday, the Fed is expected to announce it will resume the large-scale purchase of long-term US bonds -- essentially printing billions of dollars -- in the hope of boosting a weak recovery.

While the Fed took similar measures during the crisis, it is unprecedented when the economy is not teetering on the edge of collapse, raising protests from some Fed members who fear it is unnecessary and will fuel long-term inflation.

Critics of the policy argue that although the recovery is painfully slow, markets should be allowed to do their work. They also worry that if the policy fails the Fed's credibility will be wrecked.

"I think that this will quite possibly be the worst mistake by the Fed in a generation," said Stephen Stanley of Pierpont Securities.

But supporters argue that the Fed is failing in both of the prongs of its dual mandate, with unemployment and inflation both at unsustainable levels and must act.

Since Fed chairman Ben Bernanke first suggested the possibility in late September, and confirmed it in October, markets and most economists have penciled in another round of quantitative easing (QE) as a solid bet.

Goldman Sachs analysts and others predicted the rate-setting Federal Open Market Committee would start with a purchase of about 500 billion dollars in Treasury bonds.

The Fed already has poured in more than 1.5 trillion dollars to spark a recovery.

The FOMC meeting opened Tuesday in the thick of hotly contested congressional and local elections nationwide.

President Barack Obama's Democrats are poised to lose seats in Congress to Republicans, who oppose the administration's massive stimulus spending that dragged the economy out of the worst recession since the Great Depression, but ran up sky-high deficits doing it.

A government report Friday showing only modest third-quarter economic growth bolstered expectations of further Fed stimulus to lower long-term interest rates and fight off deflationary pressure in the slack economy.

The world's largest economy grew at a 2.0 percent annual rate in July-September, in line with expectations, slightly more than a 1.7 percent expansion in the second quarter.

Economists consider that economic growth must reach about three percent for some time to significantly reduce high unemployment.

But more than a year after the recession officially ended, unemployment has been hovering near double-digits.

When the government reports payroll data on Friday, the jobless rate was expected to remain stuck at 9.6 percent for the third straight month in October.

"The US economic recovery continues on, but growth remains too weak to cause a serious improvement in the labor market," said Augustine Faucher at Moody's Analytics.

Amid that backdrop the Fed has left interest rates at historic lows and is unlikely to change that stance any time soon.

Nomura Global Economics analysts predicted the FOMC statement would include a commitment to continue buying until the committee's forecasts show significant progress toward full employment and inflation approaches more acceptable levels.