The Federal Reserve, opening a crucial two-day meeting on Tuesday, appeared ready to throw the U.S. economy a new life line even as questions raged over whether it might do more harm than good.

The meeting is widely expected to end with a controversial decision to buy hundreds of billions of dollars in U.S. government debt to try to foster a stronger recovery.

Policymakers are disappointed the unemployment rate is stuck at 9.6 percent and are worried a deflationary spiral could emerge, with core inflation already running at lows not seen since the 1960s.

They hope fresh purchases of government bonds will lower borrowing costs and spur spending. However, many economists -- and some Fed officials -- warn the impact could be minimal and some worry the program, which has sparked a vigorous debate at the central bank, risks rampant inflation down the road.

"When you get interest rates as low as they are, they can't go much lower, so I don't look for any overpowering results of this action," former Fed Chairman Paul Volcker said.

Financial markets have been on tenterhooks over the impending decision, which is expected around 2:15 p.m. on Wednesday. Since Fed Chairman Ben Bernanke first hinted at a new round of asset purchases in August, the Standard & Poor's 500 stocks index (^SPX - News) has risen 14 percent, while bond yields have plumbed lows not seen since the depths of the financial crisis.

Stocks have also been supported by expectations that Republicans, viewed as more pro-business by investors, will seize control of the House of Representatives and pick up Senate seats in Tuesday's elections, which were largely cast as a referendum on the economy.

EMERGING MARKETS CRY FOUL

The Fed cut overnight interest rates to near zero in December 2008 and has already bought about $1.7 trillion in U.S. government debt and mortgage-linked bonds.

Analysts now expect a new round of Treasury purchases totaling about $500 billion over a six-month period, with the program left open-ended to allow officials to ramp up the operation if needed.

The anticipated easing has weakened the U.S. dollar. The Australian dollar hit a 28-year high against the greenback on Tuesday after a surprise rate hike from Australia's central bank, which underscored the uneven nature of the global recovery.

With the prospect of a long period of ultra-low returns in the United States, investors have flocked to emerging markets, pushing those currencies higher. Emerging economies, worried about a loss of export competitiveness, have cried foul.

"We are all under attack by the relaxed monetary policy of the United States," Colombian Finance Minister Juan Carlos Echeverry told investors on Tuesday.

The Bank of Japan, which meets on Thursday and Friday, is also poised to launch a new round of bond buying. The European Central Bank and Bank of England also meet this week, but steady policy is seen.

MISSING THE MARK

The U.S. economy grew at a modest 2 percent annual rate in the third quarter, a bit stronger than in the prior three months but too weak to make a dent in unemployment.

Inflation is well below the Fed's preferred range of between 1.7 percent and 2 percent. In the third quarter, core inflation, which strips out volatile food and energy prices to give a better view of the underlying trend, rose at a 0.8 percent annual rate, the second-slowest pace since 1962.

With 14.8 million Americans unemployed and factories operating well short of full capacity, some Fed officials see the risk of a vicious circle of deferred purchases and falling prices that could choke off economic growth.

Bernanke laid the groundwork for a further round of bond purchases by arguing the central bank was falling short of its twin objectives -- price stability and full employment.

Further bond purchases, however, are a controversial subject at the central bank and a heated debate seems assured.

The Fed owns roughly 12.5 percent of all outstanding Treasury bonds and notes. If it were to buy $1 trillion more, as some economists expect it eventually will, the portion of its holdings compared with all outstanding Treasuries could jump to 27 percent.

Some policymakers worry further purchases could jeopardize the central bank's credibility if the impact proves small. There are also concerns the Fed's bloated balance sheet may set the stage for unwanted inflation once the recovery gains traction.

Kansas City Fed President Thomas Hoenig, who is concerned the Fed's easy money policies are prelude to yet another boom and bust cycle, said on October 25 that further easing would be "a bargain ... with the devil."