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Fed Poised to Buy More Bonds to Aid Economy

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The Federal Reserve is getting ready for its latest attempt to strengthen the economy. The Fed will use a method nicknamed QE2, which stands for Quantitative Easing, Round 2.

Quantitative easing basically means the Fed will put more money into the economy and hopefully bring down long-term interest rates.

On Tuesday, Federal Reserve Chairman Ben Bernanke will open a two-day meeting where he will help craft a plan to buy more government bonds. The idea is for those purchases to further drive down interest rates on mortgages and other loans. Cheaper loans might then lead people to spend more. The economy would benefit, and companies would step up hiring. The Fed would then watch the economy, checking its strength to see how much more money it will need.

However, some economists warn that too much money could be a bad thing and lead to inflation or more financial bubbles in the future.

The Fed's aid program this time is likely to be smaller - $300 billion to $500 billion - and more gradual. In part, that's because the economy is in better shape now.

"Bernanke is trying to strike a balance," said Lou Crandall, chief economist at Wrightson ICAP.

But many economists agree that it's still a gamble.

William Dudley, president of the Federal Reserve Bank of New York, estimates that a $500 billion purchase program would provide about as much stimulus as a cut of one-half to three-quarters of a point in the Fed's main interest-rate lever. That's the federal funds rate.

That rate is already at a record low near zero. That's why the Fed is turning to unconventional methods to try to energize the economy.

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