Today's FOMC Meeting: Here's What the Fed Could Do
U.S. Federal Reserve Chairman Ben Bernanke will address the nation after today's FOMC meeting , and there's not much left in his bag of tricks to stimulate the U.S. economy and avoid the recession many are predicting for 2013 . After more than three years of trying to rouse the economy, hiring remains weak, unemployment is still elevated, and economic growth has ebbed. As the Fed concludes its two-day policy meeting today, it needs to act sooner rather than later - and may be ready to do so. "I think Fed officials will send a pretty decisive signal that they are prepared to provide more support to boost economic growth and lower unemployment," Brian Bethune, economics professor at Gordon College in Massachusetts, told the Associated Press . Here is a trio of scenarios Team Bernanke could present. What Could Happen at Today's FOMC Meeting #1: The Fed Continues Operation Twist There's a good chance the Fed will decide to continue its previous monetary stimulus method, " Operation Twist ." Under this strategy, the Fed traded $400 billion in short-term bonds for those with longer maturities. The goal of the twist is to drive down long-term interest rates. This creates an environment that makes it cheaper for businesses to obtain loans and for consumers to get a hold of mortgages and other forms of credit. Goldman Sachs Group Inc.'s (NYSE: GS) chief economist Jan Hatzius said in an e-mail to clients he expects the Fed to start a new asset purchase program. "A decision not to ease is tantamount to a tightening. At this point we'd be quite surprised if we saw no easing," said Hatzius. To continue reading, please click here...
U.S. Federal Reserve Chairman Ben Bernanke will address the nation after today's FOMC meeting, and there's not much left in his bag of tricks to stimulate the U.S. economy and avoid the recession many are predicting for 2013.

After more than three years of trying to rouse the economy, hiring remains weak, unemployment is still elevated, and economic growth has ebbed.

As the Fed concludes its two-day policy meeting today, it needs to act sooner rather than later - and may be ready to do so.

"I think Fed officials will send a pretty decisive signal that they are prepared to provide more support to boost economic growth and lower unemployment," Brian Bethune, economics professor at Gordon College in Massachusetts, told the Associated Press.

Here is a trio of scenarios Team Bernanke could present.

What Could Happen at Today's FOMC Meeting

#1: The Fed Continues Operation Twist

There's a good chance the Fed will decide to continue its previous monetary stimulus method, "Operation Twist."

Under this strategy, the Fed traded $400 billion in short-term bonds for those with longer maturities. The goal of the twist is to drive down long-term interest rates.

This creates an environment that makes it cheaper for businesses to obtain loans and for consumers to get a hold of mortgages and other forms of credit.

Goldman Sachs Group Inc.'s (NYSE: GS) chief economist Jan Hatzius said in an e-mail to clients he expects the Fed to start a new asset purchase program.

"A decision not to ease is tantamount to a tightening. At this point we'd be quite surprised if we saw no easing," said Hatzius.

Since Operation Twist was implemented in October, long-term rates have declined and mortgage rates have fallen in tandem.

But this policy has done little to boost the economy and ailing housing market. Even as mortgage rates have fallen to record low levels, the housing market is still struggling, sales are sluggish and remain a far cry from what is considered healthy.

Plus, banks have become stricter and stingier with their lending practices, averse to lending to anyone with less-than-stellar credit.

Yet, the Fed is still expected to consider extending Operation Twist beyond its original expiration date of June 30. The main reason is that Operation Twist, in comparison to other techniques of enhancing the economy, doesn't add to the ballooning deficit, and thus won't be met with much opposition.

A month ago Atlanta Fed President Dennis Lockhart said he was against extending Operation Twist. But just last week, speaking with reporters, Lockhart said that it is still one of the options on the table.

However, if the Fed takes this route, with just a restricted stash of short-term bonds in its cache, the possible impact from an extension of Operation Twist is limited at best.

#2: The Fed Introduces QE3

Twice the central bank has employed the policy of quantitative easing, and a limited number of economic analysts are wagering on a third round, or QE3.

This move, however, comes with greater risks than Operation Twist. While previous QE endeavors have moved interest rates down, they have not had an effect on the lofty unemployment rate.

Implementing a third round of Q3 most likely won't alter the fact that lending has declined. Banks are simply not lending money.

In fact, the regularity at which money changes hand in the U.S. economy currently sits at a record low and low interest rates are basically meaningless unless you can get them.

In addition, another round of quantitative easing comes with some danger. It would amplify the Fed's sketchy balance sheet and set off fireworks among conservatives and those keeping a close eye on inflation.

But QE3 could be on the horizon - if the economy gets worse.

#3: The Fed Changes the Interest Rate Forecast

Since 2008, with the aim of goosing the economy, the Fed has kept interest rates close to zero.

With little wiggle room to take interest rates even lower, the Federal Reserve can throw its weight around simply with words.

Just hinting that interest rates will stay low for an extended period can move markets. The Fed already noted that interest rates should stay "exceptionally low" until late 2014.

If the FOMC changes that wording, to 2015 or beyond, it could rouse the economy by removing some uncertainty about the path of future interest rates and inflation patterns.

However, industry analysts say that slight changes in the Fed's tone will do little to sway the economy. With the presidential election and changes in future tax and spending policies looming, a great deal stands to change over the next several years.

What's more, as Bernanke's term comes to an end in 2014, whoever succeeds him could have other ideas.

Today's FOMC meeting will conclude with an official Fed statement at 12:30 p.m. EDT; a press conference with Bernanke follows at 2:15.

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