MW: Fed busy behind scenes on third year of zero rates
No rate change expected but internal debate seen fierce
By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) — The real activity at the Federal Reserve won’t be seen in the interest rate announcement due Tuesday but will show up next year as central bankers prepare for big decisions in the coming months.
“While the December [Federal Open Market Committee] meeting is likely to produce no explicit action…the elves in Chairman [Ben] Bernanke’s workshop are busy at work behind the scenes trying very hard to make the holiday season, and the outlook for 2012, a little brighter,” said Julia Coronado, chief economist for North America for the French bank BNP Paribas, in a note to clients.
Many economists think that the Fed will engineer another round of asset purchases, or quantitative easing, early next year.
“There is a 75% chance the Fed will buy mortgage-backed securities in the first half of the year, possibly by January,” said Lou Crandall, chief economist at Wrightson ICAP LLC.
Although the economy is recovery slowly, the Fed has signaled that the high unemployment rate and weak housing market call for a policy response, he added.
“The numbers are getting better, but not enough to keep them complacent,” Crandall said. See charts on recent economic data.
“QE3 is looking increasingly likely,” agreed Dana Saporta, a U.S. economist at Credit Suisse in New York.
The purpose of the asset purchases at this juncture would be to help stabilize the financial system and alleviate interest rate risk and uncertainty, Saporta said in a note to clients.
She noted that Fed buying MBS would be timely given growing anecdotal reports that said European banks are selling dollar-denominated assets such as mortgage securities.
Fed officials will meet Tuesday for a one-day meeting. A statement is expected at 2:15 p.m. There will not be a press conference by Bernanke.
The central bank is expected to leave the Fed’s key interest rate at an historic low range of 0% to 0.25%. This will be the third anniversary of rates near zero, a sign of just how weak the economy remains.
The Fed is expected to maintain its guidance that it intends to keep rates near zero until mid-2013 given its expectations for the economy.
But this guidance will be central to the Fed’s discussions at the meeting.
Analysts think the Fed will spend the bulk of the meeting fleshing out details of a planned overhaul of how they signal policy
