Should the Fed do nothing?
byJun 24th 2009 9:30AM
As media sources point out, the last thing that Federal Reserve Chairman Ben Bernanke wants Wall Street to think is that he's going to act rashly. The Associated Press bluntly argues that "most economists predict Fed Chairman Ben Bernanke and his colleagues won't launch any bold new efforts at the end of a two-day meeting Wednesday."
Stock markets in Europe climbed on expectations of the meeting. Fed officials are expected to issue a statement at 2:15 p.m. Eastern time. Markets are rising also because the Mortgage Bankers Association said Tuesday that mortgage applications climbed from a seven-month low. Investors are looking to the Fed for proof that the rally in the stock market that pushed the Dow Jones Industrial Average up 27 percent from 12-year lows reached in March is justified.
For now, the Fed will need to play the role of therapist to calm the frayed nerves of investors. It's a difficult hill to climb.
According to Bloomberg News, the Fed's Open Market Committee may stress that increasing flexibility in the economy will contain consumer prices into next year. The committee members also will likely discuss how to avoid a jump in longer- term Treasury yields once they completed their plans to buy $300 billion in Treasuries as soon as August.
"At stake is heading off a further surge in borrowing costs fueled by concern that record Fed liquidity injections and unprecedented government borrowing will cause inflation to accelerate," Bloomberg News said. "That would endanger prospects for an economic recovery at a time when house prices continue to fall and unemployment approaches 10 percent."
Since the Fed does not want to upset the apple cart, economists expect the central bank to hold its target for the federal funds rate, the rate which banks charge each other for overnight loans, in the zero to 0.25 percent range reached in December, according to Reuters.
Though the Fed may want to leave it well enough alone, that may not prevent members of Congress from resisting the temptation to meddle in the economy.