next meeting of the federal reserve
If you're handicapping the U.S. Federal Reserve's two-day Federal Open Market Committee (FOMC) meeting that concludes today (Wednesday), you can make the following two predictions - and you'll almost certainly be right:
- U.S. Federal Reserve Chairman Ben S. Bernanke will announce some form of economic stimulus.
- But the short-term benefits will be small, and any long-term benefits won't be enough to help out-of-work Americans or jump-start the wheezing U.S. economy.
Troubling TrendsIf anything, the nation's economy looks worse today than it did on Aug. 9, which is when central-bank policymakers last met. The "official" unemployment rate remains at an alarming 9.1% - with no jobs added in August - and true joblessness may range from 17% to 23%. Housing starts declined last month by the greatest amount since April. And the International Monetary Fund (IMF) just downgraded its U.S. growth forecast to 1.5% from 2.5% [To see related story in today's issue, please click here].
The spreading European sovereign debt crisis continues to whipsaw stocks, oil prices and gold. And several dramatic single-day plunges - in stocks and in gold - spooked investors for days after the event.
Bernanke feels pressure to act, but the odds that Federal Reserve policy can make a meaningful splash are low indeed, Money Morning's Fitz-Gerald says.
What to Expect From Today's FOMC MeetingSince the Fed's actions have so far done little to ignite economic growth, investor expectations were muted ahead of today's FOMC meeting conclusion.
"It looks like the market is baking in an announcement of some kind of quantitative-easing strategy," Deirdre Dennehy, portfolio manager at Rockland Trust, said in an interview. "[But] for them to announce a QE3, I'm not sure how impactful that's going to be. The more times they do that, the less the effect in the market."
Analysts expect the Fed will attack longer-term rates by adjusting its $1.7 trillion portfolio of U.S. Treasury securities.
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Three Moves to Make Before the Next FOMC Meeting
The decisions made at the next Federal Open Market Committee (FOMC) meeting on Sept. 20-21 could affect market performance for years to come.
That's why investors should prepare ahead of time.
Of course, there's no way to predict exactly what U.S. Federal Reserve Chairman Ben S. Bernanke will do, but 20 years of experience in global markets suggest he's considering five alternatives drawn from a rapidly diminishing menu of options:
- Eliminate interest paid on reserves.
- Sell short-term securities while buying longer-term debt.
- Target actual inflation.
- Buy more assets outright in a program that would be somewhat like the $600 billion worth of Treasuries it bought as part of QE2.
- And, finally, it could just do nothing.
Let's look at the Fed's options first.
Option #1First, the Fed could eliminate interest paid on reserves. Banks would hate this, but it would go a long way towards encouraging lending.
Banks right now are borrowing at extremely low rates, building up huge cash stockpiles and investing the spread. By doing this, the banks are earning more than they would from even their best customers at a fraction of the risk.
Customers have become almost irrelevant as a result, which is something our leaders cannot seem to grasp. So while they're ostensibly all about helping Main Street, they're really just selling out to Wall Street.
We have to get the money to the consumer where it can be used to create wealth.
Option #2The second solution is to sell short-term securities while buying longer-term debt. You may recall that the Fed did this in 1961 as part of something they called "Operation Twist."
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