Many on Wall Street hope Federal Reserve Chairman Ben Bernanke will unveil a new effort Friday to boost the economy in a highly anticipated speech in Jackson Hole, Wyo.
Economists say a major new program is unlikely. But Bernanke will likely lay out the Fed's options for lowering long-term interest rates even further.
His speech comes at a pivotal moment for the U.S. economy. Growth has slowed. Stock prices have been gyrating. Europe is struggling to contain a spreading debt crisis. And analysts have been reducing their forecasts for growth this year and next.
The situation resembles the one Bernanke faced last year. He responded at the annual economic conference in Jackson Hole by suggesting that the Fed could buy more government bonds. The goal was to reduce long-term rates, stimulate spending and lift stock prices.
The Fed began buying $600 billion in Treasurys in November and completed its purchases in June. Stock prices rose steadily throughout the bond-buying program.
One reason few expect any such dramatic step this time is that just two weeks ago, Fed policymakers said they would keep short-term rates at record lows for two more years.
"It would seem strange for Bernanke to conclude so soon that this move was not enough," Paul Dales, an economist at Capital Economics, said in a note to clients.
Inflation is higher than it was last year, though still within the Fed's target range. But the Fed prefers to consider "core" inflation, which excludes volatile food and energy prices. Core prices rose 1.8 percent in July from July last year.
That's twice the rate in July 2010, when the Fed was worried about deflation _ a debilitating drop in prices and wages. Last month, Bernanke said the Fed would consider further steps if the threat of deflation returned.
The Fed chairman will likely outline the economy's challenges and explain why growth will probably stay weak for several years, analysts said.
After its Aug. 9 meeting, the Fed said it would keep its options open in case conditions worsened. Bernanke has previously outlined those options:
_ Buying more longer-term securities. The Fed could replace its short-term Treasurys, once they mature, with longer-term securities. The idea would be to reduce longer-term rates, such as those for mortgages and auto loans. Doing so might spur more consumer spending, which accounts for about 70 percent of the economy.
_ Reducing interest rates on bank reserves. The Fed could start paying banks less interest on the excess money they keep at the Fed. The Fed pays only about 0.25 percent interest now. But paying even less could encourage banks to lend more money rather than hoarding it at the Fed.
_ Clarifying how long the Fed will maintain its portfolio of bonds and other securities. That portfolio amounts to about $2.9 trillion, mostly government bonds and mortgage-backed securities. Reinvesting the proceeds from maturing bonds could keep the Fed's portfolio stable and help keep down rates. And providing a rough timetable could give investors confidence about how long rates will stay low.
_ Launching another round of government bond purchases. The $600 billion in Treasurys the Fed bought earlier this year was the second round of such purchases. Bernanke argued last month in testimony to Congress that the Fed's second round of purchases _ dubbed quantitative easing II , or QE2 _ helped keep rates down and stave off deflation.
Critics question whether those purchases helped the economy. Some argue that by injecting more dollars into the financial system, the Fed raised inflation pressures and potentially reduced consumers' purchasing power.
"If QE2 worked so well, why are we talking about QE3?" asked Tom Porcelli, chief U.S. economist at RBC Capital Markets.
Consumers are trying to pay down debt, Porcelli said, and don't want to take out more loans, even at low rates. Mortgage rates are near record lows. Yet that hasn't spurred home buying.
"Growth is likely to be sluggish for a while, and there's not a whole lot the Fed can do right now," said Mark Vitner, an economist at Wells Fargo Securities. "The U.S. economy is going to have to gut it out."