Bernanke & Co to the Rescue?
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The U.S. credit rating downgrade, European credit crisis, massive stock sell-off and slowing global growth puts a major emphasis on Tuesday's FOMC meeting.
Bernanke & Co. will meet in a one day meeting and issue the Fed statement at approximately 2:15pm ET. This meeting will not include a press briefing.
Investors want the Fed to indicate that some form of additional easing measures are on the table. Whether this is a resumption of the bond buying program, or some other measure remains to be seen.
In the past, Bernanke has stated the risk/reward of additional bond buying programs might not be favorable, meaning other measures may be needed to stimulate the economy.
Other ideas for the Fed could include Treasury caps, where the Fed will effectively place targets on Treasury yields along the curve. The Fed did this in the decade before 1951.
One other interesting idea for the Fed would be to buy foreign securities. In his 2002 "Helicopter Ben" speech, Bernanke discussed this idea. "For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt," he said in the speech.
If the Fed was to buy foreign securities, it would have widespread impact on the FOREX market.
As an example, Bernanke highlighted that in 1933-34 Franklin Roosevelt devalued the dollar 40 percent against gold. He explained, "The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation."
Bernanke & Co. will meet in a one day meeting and issue the Fed statement at approximately 2:15pm ET. This meeting will not include a press briefing.
Investors want the Fed to indicate that some form of additional easing measures are on the table. Whether this is a resumption of the bond buying program, or some other measure remains to be seen.
In the past, Bernanke has stated the risk/reward of additional bond buying programs might not be favorable, meaning other measures may be needed to stimulate the economy.
Other ideas for the Fed could include Treasury caps, where the Fed will effectively place targets on Treasury yields along the curve. The Fed did this in the decade before 1951.
One other interesting idea for the Fed would be to buy foreign securities. In his 2002 "Helicopter Ben" speech, Bernanke discussed this idea. "For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt," he said in the speech.
If the Fed was to buy foreign securities, it would have widespread impact on the FOREX market.
As an example, Bernanke highlighted that in 1933-34 Franklin Roosevelt devalued the dollar 40 percent against gold. He explained, "The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation."
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