There are three kinds of announcements the Federal Reserve may make Wednesday at 2:15 p.m., when it discloses the much-anticipated results of the latest meeting of its policy-making committee:
Full speed ahead. Growth is lethargic at best. Twenty-five million Americans cannot find full-time jobs. The Fed is responsible for addressing unemployment, it has undertaken a series of novel efforts to stimulate growth, and the Fed chairman, Ben S. Bernanke, has not discouraged speculation that he is ready to try again.
Investors are expecting a new effort to reduce long-term interest rates modeled on a 1960s program dubbed Operation Twist. The central bank has made borrowing cheaper for businesses and consumers by purchasing more than $2 trillion of government debt and mortgage-backed securities. By reducing the supply of securities available to other investors, it forced them to pay higher prices — that is, to accept lower interest rates — and to shift money into riskier investments with much the same effect.
The Fed could seek to amplify that impact by reorienting its portfolio toward longer-term securities, essentially taking on more risk without investing more money. That could force other investors, in turn, to take larger risks in the face of lower returns. And the hope is that the resulting drop in interest rates will nudge companies to build new factories, and consumers to buy new dishwashers.
Morgan Stanley, which expects the Fed to announce such a program Wednesday, said in a note to clients that it is “no silver bullet,” but could lower yields on 10-year Treasuries by up to 0.35 percentage points, similar to the drop from the Fed’s most recent purchases of $600 billion in Treasuries.
Check back in November. Some close watchers of the central bank expect that the Fed will defer any decision to “Twist” — or take any other major steps — until the board next meets in November, but that the board will make a smaller gesture Wednesday to signal its commitment to help.
Only a month has passed since the Fed announced that it intended to hold short-term interest rates near zero for at least two more years, and the board may want to wait before announcing further measures. The economy, after all, is growing at a modest pace and the options that remain available carry less power to lift growth and greater risk of consequences than those already deployed.
Moreover, investors already have driven down long-term interest rates in anticipation of action by the central bank. So long as investors remain convinced that the Fed will act eventually, there is little to be gained by unveiling such a program. Laurence H. Meyer, a former Fed governor who now leads the forecasting firm Macroeconomic Advisers, suggests the Fed could announce that it will invest the proceeds of maturing securities — about $20 billion each month — in longer-term debt.
“Together with a strongly worded statement, this decision could help avoid a significant market sell-off,” MacroAdvisers wrote in a note to clients predicting the Fed would announce such a gesture Wednesday, and then announce a revival of Operation Twist after the board’s November meeting.
We’re not doing anything new. Republicans have been increasingly vocal in their insistence that the Fed should stop trying to increase growth. They argue that the central bank’s existing efforts are not helping, and that new efforts could have negative consequences. Republican presidential candidates have made criticism of the Fed a central theme of the early campaign, and Republican leaders in the House and Senate sent a letter Tuesday to Mr. Bernanke warning against new measures.
“We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy,” said the letter, signed by Mitch McConnell of Kentucky, the Senate Republican leader; Jon Kyl of Arizona, the Senate Republican whip; the House speaker, John Boehner of Ohio; and the House majority leader, Eric Cantor of Virginia.
A vocal minority of the Fed’s policy-making board shares this reluctance to take further action. Three of the board’s 10 members dissented from the board’s most recent effort to foster growth in August.
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