Hope springs eternal on Wall St for more Fed action

New York: With Europe’s ongoing financial crisis still hanging like a depressing cloud over the global financial system, the Federal Reserve opened a two-day meeting on Tuesday with hope springing on Wall Street for more action from Federal Reserve chairman Ben Bernanke.

Investors are watching closely for a statement from the Fed’s monetary policy setting committee which is due out around midday on Wednesday.

“With the Greek election out of the way, we’re getting some follow through from yesterday because there’s hope the Fed will intervene,” Paul Simon. chief investment officer at Tactical Allocation Group, told The Wall Street Journal.

“Markets will be disappointed if they do nothing,” he added.

[caption id=“attachment_194782” align=“alignleft” width=“380” caption=“What will Big Ben do? Getty Images”]  [/caption]

We saw the familiar Fed-rally on Tuesday as the Dow Jones Industrial Average closed up 96 points at 12,837 as investors speculated on additional stimulus from central bankers. US stocks had rallied in a similar way during the April Federal Open Market Committee meeting, and subsequent sessions, with the Dow rising about 350 points in six sessions.

More from Investing

MSMEs are breaking the traditional convention. Look who’s funding them Scale-up your startup without an investor! Here’s how

The eternal optimists

Since the financial crisis, the Fed has launched two rounds of quantitative easing, or QE, by buying bonds to drive down interest rates. One started in November 2008 and ended in June 2010. The second, dubbed QE2, started in November 2010 and ended in June last year.

The Fed’s most recent stimulus effort is called Operation Twist, where the central bank swaps short-term assets in its portfolio for longer-tern assets. The idea is to push down long-term interest rates, making it easier for businesses and consumers to get credit. That program started in September last year and is due to end on 30 June.

Economists say the Fed could opt to extend Operation Twist beyond the end of this month. Others are hoping for something bigger, such as another massive bond-buying program, or QE3.

“I think if there’s a significant risk, and action is needed, they may need to do something this week,” Former Richmond Fed president Al Broaddus told CNBC. “My guess is it will be some kind of modification of Operation Twist.”

The Bears

While the bulls are betting on something very big coming out from the Fed’s meeting on Wednesday, others are less sure. In keeping with his bearish reputation, David Rosenberg, chief economist and strategist at Gluskin Sheff believes the bulls will be “disappointed” by the Fed meeting.

He told the finance blog Daily Ticker that he doesn’t believe the US central bank will announce another round of quantitative easing, at least not this week.

Rosenberg also felt there were limits to what the Fed could do to boost the economy. He said there’s nothing the Fed can do to resolve Europe’s fundamental crisis or address the looming US “fiscal cliff.” Americans are concerned that Congress won’t reach a compromise in time to avoid automatic tax increases and budget cuts that would pull billions of dollars of purchasing power out of the US economy.

“There’s abundant uncertainty right now and, frankly, monetary policy is a very blunt tool to deal with fiscal policy uncertainty,” Rosenberg told the Daily Ticker.

Most economists, however, feel the US economy can use an additional boost. They say the rate of job creation in the last two months understates the underlying growth path, since it is essentially a payback from the stronger growth due to an unusually good winter.

Even if the Fed doesn’t act after its meeting on Wednesday, it will send a clear message that it is standing by to do so if needed.