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Big Day Tuesday: The Fed

The Federal Reserve began a two-day policy meeting on Monday which is expected to conclude with another rate cut.

Most economists believe the U.S. central bank will lower its target for benchmark overnight rates by at least a half-percentage point to 0.5 percent. However, “it’s the least interesting Fed meeting we’ve had in months," says Jim Iurio of TJM Institutional Services on Fast Money. He feels a rate cut has no impact other than as a psychological tactic.

That’s because "cutting interest rates is now like pushing on a string. You won't get much impact," adds Mohamed El-Erin, chief executive officer at the giant bond firm PIMCO.

Instead, the focus will be on so-called quantitative easing measures.

Quantitative easing, which recalls the emergency steps taken by Japan to expand the supply and circulation of money to end a deflationary decade of stagnation in the 1990s, was discussed by Fed Chairman Ben Bernanke in a speech on December 1.

"Our nation's economic policy must vigorously address the substantial risks to financial stability and economic growth," the Fed chief said.

Bernanke said the Fed could directly intervene in markets to stimulate the economy, saying it could purchase U.S. government bonds to drive down yields or private sector debt to narrow spreads and lower borrowing costs.

With yields on U.S. Treasury debt already very low, economists say the Fed may get better results by aiming at mortgage-backed securities. Increasing demand for these bonds should help to reduce mortgage rates, spurring demand for homes and hopefully halting the slide in housing prices.

How to play it?

Although the jury is out over inflation, some economists believe that setting the Fed funds rate below 1% will eventually spark higher prices. (The other camp argues that deflation is the bigger threat.)

If you expect inflation to eventually become a problem, Iruio told our producers that he recommends buying Exxon, the GLD ETF and some other mining stocks. The idea behind the trade is this. As the prices for oil, gold and other precious metals increase due to inflation, so should the shares.

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Trader disclosure: On Dec. 15th, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (MSFT), (WMT), (SDS), (MCD); Najarian Owns (FCX), (RDC); Najarian Owns (BMY) Calls; Najarian Owns (NUE) And Is Short (NUE) Calls; Najarian Owns (UYG) And Is Short (UYG) Calls; Finerman's Firm Owns (AET), (DSX), (MSFT), (DVN), (APC); Finerman's Firm Is Short (VNO), (IYR), (IJR), (MDY), (SPY), (IWM), (COF), (USO); Seygem Asset Management Owns (FXI); Seymour Owns (AAPL), (BAC), (F), (MER), (TSL), (CCJ); Seymour Owns Shares Of Uranium One, Inc.

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Iuorio Has A Short S&P 500 Position And A Short Vol Position
Iuorio Has A Long Position In (C)