No one expects Federal Reserve Chairman Ben Bernanke to pull a rabbit out of his hat after quantitative easing ends today, but he may still have a few tricks up his sleeve if the economic picture fails to improve.

For now, the Fed is set to sit tight. Along with investors, Bernanke is looking for a silver lining in economic data. If this summer's numbers turn bleaker, then Bernanke's team will be forced to go back to the drawing board, that is, if it hasn't already done so. Bears will of course say, "I told you so."

Traditionally, the central bank has three tools for monetary policy -- buying and selling treasuries in the open market, setting the discount rate and dictating reserve requirements -- all of them blunt at best.

We stretched our imaginations to find the leftovers in Bernanke's toolbox. Not surprisingly, the following list comes with big caveats from analysts. And don't forget, Bernanke has his own warning too: "All of these things are somewhat untested."


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1. Cut the interest rate on excess reserves

The current rate that the central bank pays banks holding more deposits than required is 0.25%, about the rate at which banks lend to each other. If the Fed lowers the rate on excess reserves, the mechanics say that banks should loan out more, both to each other and to the public.

Can this work?

"It should," says Steve Blitz, economist at ITG Investment Research.

"Looks promising," says Peter Cardillo, chief market economist at Avalon Partners.

However, just because banks might be more willing to supply money, lenders won't necessarily jump at the opportunity to borrow. The Fed can essentially toy with the "supply side," explains Blitz, but if a corporate America doesn't want the extra cash (and corporations do have a lot of cash sitting on their balance sheets already), then forcing more liquidity is pretty useless.

2. Buy more securities and structure them differently

Otherwise known as a third round of quantitative easing in disguise. The Fed has already said it will keep buying up long-term Treasuries in the months to come. Total purchases will likely add up to at least $300 billion. Investing in corporate bonds is still an option on the table. Albeit we were in quite different times during the housing bubble when the central bank dumped $1.25 trillion in mortgage-backed securities, we've learned that the Fed is ready to move on new methods when necessary.

The verdict from analysts?

"It's clear that a couple of reserve members have already said enough is enough," says Robert Johnson, director of economic analysis at Morningstar, who doesn't think we'll see a QE3.

"Unlikely," says Blitz. "We've been down this road with QE2... Bernanke already stated that we are in a different position than we were in a year ago, given that unemployment is better and deflation risk is smaller."

"Buying different types of securities might capture people's attention because it's bizarre and new," says James Paulsen, chief investment strategist at Wells Capital Management. However, Paulsen says that because there is so much liquidity already, pumping in more is akin to dumping a bucket of water into the sea.

3. Give guidance on the Fed's balance sheet

The Fed could be more transparent in its plans for structuring the $3 trillion-worth of securities currently on its balance sheet. That might mean more clarity in the breakdown of long verses short term securities. This is similar to tool #2 in which the Fed would formally announce which securities it plans to buy.

4. Set an inflation target

Targeting a low inflation rate should help anchor expectation. Americans might feel more confident about spending and businesses might feel more willing to invest. However, the Fed might hit a roadblock in determining which measure of inflation to target. Energy and food inflation hit consumers the hardest but some of the inflation comes from factors abroad rather than domestic.

The analysts were overwhelming negative on this one. Bernanke's answer in his last speech was lukewarm (it's "worth considering").

"We can't be that accurate in setting inflation," says Paulsen.

"I don't think this is going to help out," says Johnson. "By law, the Fed probably can't do it."

"It's a nice thing for the long term" but setting a target comes with many nuances, says Blitz.

5. Define what the Fed means by "extended period"

Reporters at the last Federal Open Market Committee meeting pushed Bernanke to pinpoint exactly how long the Fed intends to keep the federal funds rate near zero. It seems unlikely that Bernanke will hash out the language here further given that he already said the timeline depends on how the economy, inflation and unemployment evolve. "...The reason we use terms like 'extended period' is not be intentionally opaque," said Bernanke. "The reason is that we don't know exactly how long."

Bernanke appeased the public somewhat by revealing the Fed would not take action for at least the next two or three FOMC meetings.

Analysts seem to sympathize with Bernanke: "The Fed wants to leave itself some leeway and not put itself in a box," said Morningstar's Robert Johnson. After all, "they don't want people to say, you're a liar and a cheat."

6. Take a bold stance

We all know the Fed is in a pickle. It can try to fiddle with the fundamentals, but if confidence in America's economy doesn't budge, a downturn becomes a self-fulfilling prophesy.

Wells Capital's James Paulsen proposes a raise in the interest rate to 50 basis points.

The Fed's actions are hurting the American psyche, he explains. Raising the interest rate would signal to the markets "hey, we want you to know that the economy is sustaining in its recovery."

-- Written by Chao Deng in New York.

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scottee

The Fed needs to be audited and ended. they are dead wrong for printing and diluting our dollar and they need to stop manipulating interest rates and gold prices and stock prices. we can weather free market ups and downs...we cannot weather government manipulated market ups and downs.

July 06 2011 at 9:28 AM Report abuse rate up rate down Reply
OMVCO.COM

seems unlikely that the fed will be able to avoid another round of quantitative easing though perhaps under a different heading. economic indicators appear too anemic to rely on organic growth.

July 03 2011 at 7:35 PM Report abuse rate up rate down Reply
nomorebarry7

Screw the FED , banish them !

July 01 2011 at 7:39 PM Report abuse rate up rate down Reply
prognesub

QE 3 is next; it just won't be announced.

July 01 2011 at 2:59 AM Report abuse rate up rate down Reply
DDerr

The best move Bernanke could do for America? Close down the Federal Reserve ASAP, and get a real job. That man leads an organization that pretends to be helping America, as it reaches into our back pockets and picks billions of dollars from us! The Federal Reserve was only made legal after a short sighted corrupt Wilson gave the largely Jewish run Federal Reserve the right to print up money, loan it to presidents who couldnt stay in budget, and then CHARGE THE AMERICAN PEOPLE INTEREST ON THE PRINTED UP MONEY! WHAT IS THIS?
In addition, Bernanke hasn't been right on ONE PREDICTION! Folks, we need to get rid of this governmental credict card (the Federal Reserve) so our politicians can't line their pockets, get us into wars, grow the government without having the money! This is the EXACT reason we are in the mess we are saddled with now! Jefferson clearly wrote "Only the Federal Government shall have the right to coin money". Tell that to Bernanke and the rest of the theiving Federal Reserve.

June 30 2011 at 5:09 PM Report abuse +2 rate up rate down Reply
1 reply to DDerr's comment
scottee

I think it's crap that our presidents, past and present, and our congress are letting The Fed run amok. but I guess congress and the president are running amok also. we don't have to be victims. we can vote out every incumbent, every election, every time...just because...just to take back the power and stop the deficit spending.

July 06 2011 at 9:57 AM Report abuse rate up rate down Reply
bhawkes328

I hope the street

June 30 2011 at 3:28 PM Report abuse rate up rate down Reply
marine1942

Ben could become a craz---after all, he has been working for Obama all along. Two failures !!!

June 30 2011 at 2:52 PM Report abuse +2 rate up rate down Reply
someoneole

So far everything that Bernanke has done has been a total failure, and I believe that to continue on the same path will be disastrous. What people need is employment and to have a disposable income ,and so long that we have free trade there will not be an economical recovery for the majority of US citizens.

June 30 2011 at 1:51 PM Report abuse +1 rate up rate down Reply
1 reply to someoneole's comment
bggdg

Yes, cuz who could know more about with whom you exchange and under what conditions you do so than a knuckle-dragging goon from Foggy Bottom! I mean, in your immense incapacity, how could you possibly be expected to make such decisions on your own?

June 30 2011 at 3:15 PM Report abuse rate up rate down Reply
jhrochesterny

lower interest rates below .25%??thats just about zero now, hows that going to help anything?
Best be thinking of how get people working again. Like bringing back jobs from China and India. That will get things going again. Or how about ending the wars that we cant afford?

June 30 2011 at 1:24 PM Report abuse +3 rate up rate down Reply
tebad

Watch "To Big To Fail" on HBO on demand. They didn't have a clue then and a couple of years later they still DON'T.

June 30 2011 at 12:28 PM Report abuse +1 rate up rate down Reply
1 reply to tebad's comment
bggdg

Of course they didn't then and don't now have a clue about how government manufacture's economic growth. That's because government doesn't manufacture economic growth. Hence, there are no such clues. Just look at some of the stupid ideas proposed below. "lower everyone's mortgage principal balance by 1/3 for 5 years" "issue a special class of bonds that are available only to individual American citizens and pay a special interest rate" These sound like the type of pea-brained plans that might be hatched by knuckle-dragging mouth-breathers from Foggy Bottom who are incapable of wrapping their tiny minds around the obvious unintended consequences of their own plans. It was no accident that Obama's $850 billion economic stimulus destroyed a net 550,000 jobs. When the government spends $850 billion more, that's $850 billion less that would have been spent or invested by the private sector. In this case, the $850 billion spent by the goons created 450,000 jobs, but the $850 billion less allocated by the private sector destroyed 1,000,000 jobs. So of course the goons don't have a clue. Don't expect them to acquire one either. In fact, run as fast as you can from any of them who claim they do have a clue.

June 30 2011 at 2:04 PM Report abuse +1 rate up rate down Reply