Monday's dizzying stock market dive has heightened speculation that the Fed could take steps to ease market jitters that some fear could help topple a teetering economy into recession. The recovery is already sputtering amid weakening manufacturing activity, sluggish retail sales and European debt woes.
"I'm looking for (the central bank) certainly to do something," says Nigel Gault, chief U.S. economist of IHS Global Insight.
Yet Gault, like many economists, says any move likely would involve a largely symbolic change in the language of its policy statement, rather than another big purchase of Treasury bonds aimed at lowering interest rates. And Conrad DeQuadros of RDQ Economics notes the Fed's mission is to keep inflation and unemployment low — not to respond to stock market gyrations.
Plus, "It's too soon to give up on expectations that growth will pick up" in the second half of the year, says Jim O'Sullivan, chief economist of MF Global.
Last fall, the Fed launched $600 billion in Treasury purchases to lower interest rates, following a similar $1.7 trillion stimulus during the financial crisis. Last year, however, the central bank worried about deflation, or falling prices, that could have derailed the recovery. This year, inflation has increased to about 2%, and pumping more money into the economy would fuel concerns about rising prices, DeQuadros says.
What's more, he says, borrowing costs are already at historic lows. "It's not … interest rates that's holding back the economy," he says.
Other Fed options:
•The central bank has been saying interest rates are expected to remain near zero for "an extended period" that's widely understood to mean several months. The Fed could provide a more specific, longer time frame. Policymakers also could clarify they won't sell the Fed's more than $2 trillion in securities for a similarly extended period.
•Exchange short-term bonds in its portfolio for longer-term ones to further lower interest rates for mortgages and other loans.
•Cut the interest rate on reserves that banks keep at the Fed to encourage them to lend more. The rate is already 0.25%. "I don't think (the current rate) is causing banks not to lend," DeQuadros says.
