Will the Fed Introduce a New Easing Policy?

The Federal Reserve will deliver its policy statement Tuesday, and many are hoping that it will include some form of economic stimulus to brace markets against further losses incurred by investor panic after the S&P downgrade. On Monday, U.S. stocks saw their biggest one-day drop since December 1, 2008, with the financial sector especially hard-hit, following Standard & Poor’s (NYSE:MHP) decision to downgrade the credit rating on U.S. government debt (NYSE:TBT).

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With another recession, which the country is even less prepared to handle than the last, becoming more and more likely as markets continue their downward trend, many are expecting some sort of easing policy to come out of the Fed’s policy meeting today. Should that not be the case, markets are likely to respond by falling even further.

Economists argue that the Fed is unlikely to announce anything like its previous monetary easing policy today, and at best might suggest it will revise its growth forecasts downward, which could signal that the Fed is preparing to accommodate another policy in the near future.

Economists also say it’s plausible that the Fed might begin reinvesting proceeds of maturing bonds in its portfolio into longer-dated Treasury (NYSE:TLT) maturities, which would push down borrowing costs on longer-term bonds. However, long-term borrowing costs are already at their lowest level in over two years, so that step might prove rather unnecessary and unhelpful.

The Fed might also reluctantly resort to purchasing bonds, though economists say the move would only be modestly effective.

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