(Restores dropped word "if" in the 2nd sentence of the 23rd paragraph)
By Ann Saphir
SAN FRANCISCO, Sept 17 (Reuters) - The Federal Reserve this week is expected to start winding down an epic economic stimulus that is credited with helping the United States claw back from the deepest slump since the Great Depression.
The Fed's $2.8 trillion "quantitative easing" program has, among other things, lifted stock prices to record highs, driven interest rates to record lows and put a floor under what had been a reeling housing market.
Yet barely a quarter of Americans even know what it is.
A poll leading up to the Fed's pivotal decision, expected Wednesday afternoon, found just 27 percent of U.S. adults could correctly pick the correct definition of quantitative easing from among five possible answers.
Quantitative easing, or QE for short, is when the Fed buys bonds in order to push down interest rates and boost the economy.
The ongoing Reuters/Ipsos poll included interviews with 857 adult Americans between Sept. 12 and 16. The result's credibility interval, a measure of its accuracy, is plus or minus 3.9 percentage points.
The Fed's bond-buying program, particularly the current third round known as QE3, has been controversial both at home and abroad, and while some question its effectiveness, Fed Chairman Ben Bernanke says it has helped bring down unemployment and averted a damaging cycle of deflation.
Bernanke has signaled he'll look to reduce the program this year and end it next year, but keep short-term rates low for many months afterwards in order to continue to encourage investment and hiring.
CLOSE BUT NO CIGAR
Twelve percent of respondents thought QE was a computer-assisted program that the Fed uses to manipulate the dollar. Another 11 percent thought it was part of the Dodd-Frank Wall Street reform legislation enacted following the crisis.
To be sure, two of the more popular incorrect answers - "a way the Fed makes it easier for commercial banks to borrow money from Fed and relend it to consumers," and "when the Fed repeatedly lowers its official interest rate" - were in the right ballpark, if not completely on target.
After all, quantitative easing is geared to reducing borrowing costs.
But for a Fed that has emphasized how important communications are - and how much the effectiveness of its policies depends on the public's understanding of their impact on inflation and employment - the fact that 73 percent of respondents cannot define the critical program suggests the Fed has a serious communications challenge.
In particular, Fed officials have stressed how important it is that the public does not equate a reduction in quantitative easing with a rise in interest rates.
Nevertheless, the Fed's well telegraphed intention to pare back its bond buying has raised interest rates over the last five months, and markets will be watching closely for the size of the reduction.
If the public does not understand what QE is in the first place, drawing that distinction will be difficult, said Scott Anderson, chief economist at Bank of the West in San Francisco.
"I think they understand the Fed is trying to stimulate the economy, but I don't think they understand the mechanics of how it works," Anderson said. That means, he said, "People get the message that interest rates are going up."
And that can have negative effects for the economy, he said.
Margaret Miranda, a 60-year-old home health aide who lives in Truth or Consequences, New Mexico, was stumped by the question on quantitative easing.
She works part time for $8 and $9 an hour, and says wages are not keeping up with costs. She thinks unemployment is too high. But she did not know the Fed is charged with maximizing employment and stabilizing prices, let alone what quantitative easing is. She thought it might have to do with regulation.
"I was asking my husband, if he'd heard anything, because he does stocks and all that," she said in an interview. "He didn't really know either."
To Michael Woodford, a Columbia University professor whose writings on QE have been hugely influential at the Fed and other global central banks, Miranda's lack of knowledge shouldn't matter.
"The beliefs of the general public... isn't the primary channel that the Fed has been relying upon," Woodford said.
More relevant, he said, is whether bond traders understand the Fed's intent. If they drive interest rates down in response to QE, the program can be effective if those low rates then drive spending.
Larchmont, New York, resident Lynda LaMonte, 49, lost her job in the Great Recession and now works part time as a communications specialist for an economic research firm.
She too picked the wrong definition for QE. But a conversation with her made it clear that LaMonte understands the Fed's goals and, specifically, the goals of its bond-buying program.
She supports a cutback.
"It's almost like we've got Wall street dependent on that money," she said.
Michael Griggs, who is 67 and retired, also picked an incorrect answer, saying QE means the Fed is repeatedly lowering its official rate. But in an interview, Griggs was able to articulate one of the Fed's primary goals - to control inflation - and knew that one of QE's objectives is to reduce unemployment.
But to some, such a fuzzy understanding of what has become a critical monetary policy tool is not enough.
"When making investments, or taking out a loan, it's terribly important that we understand how the decisions taken in Washington affect us," said Carl Tannenbaum, Northern Trust's chief economist.
QE is unlike the Fed's traditional tool of raising and lowering short-term interest rates, and the public needs to understand its benefits, and risks, to better inform their decisions.
"The Fed at times has not done a very good job of explaining what it is up to," Tannenbaum said. "It's also fair to say that the state of financial literacy in the United States offers important room for improvement." (Reporting by Ann Saphir; Editing by Dan Burns and Tim Dobbyn)