Can the Fed end the crisis of confidence today at 2:15?

08/09/2011 1:10 pm EST


Jim Jubak

Founder and Editor,

What will Ben do—or more likely say?

This morning’s rally in U.S. stocks looks like a bet that Ben Bernanke’s Federal Reserve will calm the financial markets.

The Federal Reserve’s Open Market Committee began meeting at 8 a.m. New York time and is scheduled to issue a statement around 2:15 p.m. this afternoon. (Fed chairman Ben Bernanke isn’t scheduled to hold a press conference today. The Fed chairman conducts those only after 2-day Fed meetings like that in July.)

It’s not at all clear what the Fed can actually do. U.S. interest rates are already at 0%. The Fed has just finished a second program of quantitative easing that has stuffed its balance sheet with Treasuries. Do something dramatic? Doesn’t seem very likely.

Which would normally mean that the markets that have been so buoyant this morning would be doomed to disappointment this afternoon.

Except that a solid majority of the folks bidding up shares of Wall Street this morning aren’t expecting anything from the Fed more than talk.

Almost 60% of those surveyed by Bloomberg today expect that the Fed’s first move to address the crisis will be changing the language in its regular policy statement.

The consensus hope is that the Fed will say that the economic slowdown is persisting longer than expected—that would clear the way for the Fed to act in in the future. In addition Wall Street is expecting that the Fed will indicate that it has put off any plans to reduce its portfolio of Treasuries by letting its balance sheet gradually shrink when bonds mature.

Instead the market thinks the Fed will say that it will keep its portfolio at a record size for an extended period. (In July Bernanke indicated that this phrase meant at least two or three more Fed meetings. The Fed might today indicate that this definition has expanded.) There are even those in the financial community that expect the Fed to indicate that it will replace short-term Treasuries as they mature with long-term term Treasuries. That would have the effect of keeping the Fed’s portfolio at its current size for a longer period and would probably push down long-term interest rates in the United States.

Obviously watch the U.S stock market after the Fed releases its statement to see if the actual language is a disappointment. If the U.S. markets remain positive on the Fed’s words, then turn your eyes to Asia overnight to see if those markets are buying into the U.S. market reaction.

It’s that kind of momentum, where buying moves from one set of global markets to another, that’s needed to end the current crisis of confidence.

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