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Tax-cut plan likely to ease pressure on Fed

WASHINGTON - The Federal Reserve last month absorbed a wave of criticism for announcing it will buy $600 billion in Treasury bonds to try to revitalize the economy. It won't help, critics said.

So when Fed officials meet Tuesday, they're likely to feel a weight has been lifted: The White House and key Republicans have agreed on a tax-cut deal that's expected to do just what critics said the Fed's bond purchases wouldn't: boost spending, spur hiring and speed economic growth.

Economists say they think the Fed will still carry out its full $600-billion bond-buying plan by the end of June as scheduled. Unemployment is 9.8 percent, and the economy needs all the help it can get.

But the tax-cut plan does make the Fed less likely to buy even more than $600 billion in bonds - something Chairman Ben Bernanke said it might do if the economy needed further help. No policy changes are expected at the Fed's meeting.

"The tax-cut plan reduces pressure on the Fed to have to buy more government securities," said Mark Zandi, chief economist at Moody's Analytics. "I think they are committed to $600 billion because they aren't certain how things will turn out. It's always possible the economy could rev up rapidly. But I think the odds are low the Fed will do less."

Zandi and other economists think the tax cuts will help stimulate growth over the next two years. And consequently, the Fed might have to raise record-low interest rates sooner than had been expected. That's because stronger growth increases the risk of high inflation, which the Fed fights by raising rates to cool the economy. The tax-cut plan will also swell the government's annual budget deficits, which are already running well over $1 trillion.

Zandi and others now think the Fed will start raising rates in late 2012, compared with early 2013 without the tax-cut plan. - AP

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