At the end of the Federal Reserve’s two-day meeting, Chairman Ben Bernanke probably won’t come to the market’s rescue by announcing any new policy initiatives and may even aid a further decline with a significant downgrade of the central bank’s official economic outlook, investors said.
After two major announcements following the Fed committee meetings in August and September, Wednesday’s statement and subsequent press conference by the Fed Chief is likely to disappoint those expecting a quick fix to what ails the U.S. and global markets.
“Fed officials want to wean the markets from expecting ever more action at each meeting, and remind of the substantial easing already in the pipeline,” said Michael Hanson, economist with Bank of America Merrill Lynch, in a note. “Fed officials are likely to catch their breath on the policy front. Instead, this meeting should feature more downtrodden economic projections.”
In August, the Fedtook the unusual step of declaring that interest rates would stay at exceptionally low levels “at least through mid-2013.” In September, they announced the so-called Operation Twist, an effort to keep long-term rates low through the purchase of $400 billion in Treasurys of maturities of six to 30 years.
This time, the bulls are hoping for some sort of direct purchase of mortgage-backed securitiesto aid the housing market. Or better yet, a hint at a third round of quantitative easing in response to the Euro crisis. Major U.S. indexes dropped more than 2 percent Tuesday on fears a Euro bailout plan was near collapse.
“It will likely be the first meeting in a while where there is no change in the composition or size of the balance sheet and no fresh initiatives, like cutting the rate of interest paid on excess reserves, or guidance,” wrote Marc Chandler, global head of currency strategy at Brown Brothers Harriman. “There is some talk that the Fed will announce renewed MBS purchases, but we are not convinced the Fed is there.”
The Fed is likely to cut its GDP estimate for 2011 to below 2 percent, from a range of 2.7 to 2.9 percent given back in June, according to Chandler. Next year’s growth range may be cut by a full percentage point to as low as 2.3 percent, he said. The unemployment rate forecast will be raised back above 9 percent for 2011, according to Chandler.
The negative effect of this downgrade of the economy could be diminished if Bernanke signals in his press conference what the central bank plans to do if a worst-case scenario of a hard Greek default unfolds.
“The only thing that matters from the Fed is how they try to prepare and posture for the Europeans' game of chicken,” said Michael Farr, president of Farr, Miller & Washington. “The Fed’s thorniest job right now is preparing for the collapse of a major European bank. They'd better not waste the next crisis or be so foolish as to think it isn’t coming.”
And many believe that while Bernanke may dodge the “QE3” question Wednesday, it is inevitable for the central bank to embark on yet another liquidity injection to stave off a double-dip recession — or worse –—here at home.
“The Fed will continue holding its QE3 cards close to its vest until circumstances finally force the Fed to show its cards and play its hand out in the open,” said Peter Schiff of Euro Pacific Capital.
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