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The next Federal Open Market Committee (FOMC) meeting starts tomorrow (Tuesday), and investors expect Fed Chairman Ben Bernanke to announce some form of stimulus measures for the U.S. economy.
Investors anticipate the Fed to announce at Wednesday's conclusion new efforts to reduce long-term interest rates to allow for cheaper borrowing as well as to increase business and household spending.
"I think the Fed has no choice but to act," Krishna Memani, director of fixed income at Oppenheimer Funds, told The New York Times. "If the Fed were not to do anything having built market expectations to a pretty decent level, I think the markets would react quite negatively to that."
The Fed has already attempted to reduce long-term rates through buying more than $2 trillion in government debt and mortgage-backed securities, and has held short-term rates near zero since December 2008.
What the Fed could do next is sell short-term securities and use the money to buy long-term debt, something the government tried in 1961 called "Operation Twist." This tactic aims to flatten out the yield curve, or "twist" it so that companies would have little choice but to begin investing the capital they were hoarding.
But the Fed faces increasing pressure to avoid more stimulus measures, so it could decide to make a small move now and postpone more drastic decisions for its November meeting.
"There is no reason for the Fed to rush," Lou Crandall, chief economist at Wrightson/ICAP, wrote in a note to clients. "It is in the Fed's interest to milk the anticipation effect as long as possible."
There's also internal dissent against making any aggressive steps. Three members of the 10-person FOMC board voted against last month's decision to hold short-term rates near zero for two more years.
While Fed intervention can give markets a short boost, the stimulus measures have done little so far to help the struggling U.S. economy, leaving many Fed-watchers and analysts pessimistic.
"Well, I do think the Fed will intervene, but I don't believe for a second that the central bank's intervention will help the U.S. economy," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "As a result, we're likely to see stocks enter into a bear market and retest their March 2009 lows."
And check back in Money Morning for a recap of the FOMC meeting after its conclusion Wednesday.
News and Related Story Links:
- The New York Times:
Fed Runs Risk of Doing Less Than Investors Expect
- Money Morning:
Why the Weak Economy Will Lead to More Fed Intervention