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Fed Preview: Today's FOMC Meeting Will Prove That Team Bernanke is Out of Ideas

By Kerri Shannon, Associate Editor, Money Morning - September 20, 2011

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Fed Preview: Today's FOMC Meeting Will Prove That Team Bernanke is Out of Ideas

By Kerri Shannon, Associate Editor, Money Morning - September 20, 2011

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.

"I do think the Fed will intervene," Money Morning Chief Investment Strategist Keith Fitz-Gerald said in an interview. "But I don't believe for a second that the central bank's intervention will help the U.S. economy."

Troubling Trends

If 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 Meeting

Since 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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What to Expect from this Week's FOMC Meeting

By Kerri Shannon, Associate Editor, Money Morning - September 19, 2011

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 […]

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The Insidious Truth About Federal Reserve Policy

By Shah Gilani, Capital Wave Strategist, Money Morning • @WallStreet_II - September 15, 2011

So far, U.S. Federal Reserve policy has done nothing to help the economy. To the contrary, it's actually been quite destructive.

Yet Federal Reserve Chairman Ben S. Bernanke and his cohorts will likely expand upon their ineffective policies next week by announcing a new "Operation Twist."

That begs the question: Why?

If ultra-low rates and quantitative easing haven't put a dent in unemployment or spurred economic growth, then why expand on those programs?

The answer: Because the Fed doesn't work for the American public - it works for Wall Street .

That's right. It's not the economy the Fed has on life support - it's the banks.

America's banks are facing huge litigation costs. Worse, they've grown entirely dependent on the Fed's easy-money policy.

So the Fed is going to bail them out - again.

And we're going to be the ones who pay for it.

Federal Reserve Policy Follies

To really understand what's at play here, let's start by taking a closer look at the Fed's misguided policies.

There are two reasons why Federal Reserve policy hasn't worked: First, the Fed's artificially low interest rates are handicapping the economy. And second, Bernanke is telegraphing Fed policy decisions to the markets, giving speculators an edge over investors.

By keeping overnight lending rates between 0.00% and 0.25%, banks can borrow at next to nothing and buy risk-free U.S. T reasury securities that yield a lot more than their financing costs. The result is a "positive interest rate spread," which is the basis for banks' revenues and profits.

Additionally, banks can borrow more money by using their Treasury securities as collateral for overnight and "term" loans. Then they use the cash they borrow to buy more Treasuries. They do this over and over again to leverage themselves.

Essentially, banks have become giant hedge funds that finance their "trading books" with virtually free money, courtesy of the Fed's zero-interest-rate policy.

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