The Fed: Life after zero

With rates about as low as they can go, Fed policymakers won't be talking about more cuts at Wednesday's meeting. Here's what they should discuss instead.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Chris Isidore, CNNMoney.com senior writer

fed_rate_moves_range_0-025_small.gif

NEW YORK (CNNMoney.com) -- The Federal Reserve wraps up its two-day meeting about what to do with interest rates Wednesday afternoon. But that's probably two more days than the central bank needed.

With the Fed having already cut its key interest rate to near zero last month, there is little suspense about what the central bank's Federal Open Market Committee will announce.

In fact, the Fed said in its statement last month that it would likely keep rates near zero "for some time" due to the weakness in the economy.

Still, the rate-setting FOMC, which includes Fed governors and a selection of the presidents from the Fed's twelve district banks, is set to meet eight times this year. And while the Fed probably has more tricks up its sleeve to help the economy, don't expect them to be announced Wednesday.

"I think the Fed always has bullets left, but as a practical matter, the FOMC can disband," quipped Sung Won Sohn, economics professor at Cal State University Channel Islands. "There's not a whole lot they can do right now. "

Of course, the Fed has been unusually creative in the past year. It has established several new programs to pump more than $1 trillion into the economy in an effort to help spur the economy and get banks to start lending again.

But most of these initiatives were approved by the Fed's Board of Governors, not the FOMC. And it's quite likely that even if the Fed comes up with new programs to try to help get credit flowing again, they also won't need the approval of the FOMC.

What will the Fed be talking about?

With that in mind, the Fed provided some hints last month about what to expect at future FOMC meetings. A senior Fed official told reporters that the FOMC would continue to meet on its regular schedule, and it would provide statement's about the central bank's view of the state of economy.

The official said the FOMC would also work in conjunction with the Fed's board of governors on decisions about the Fed's balance sheet, which has ballooned in the past few months due to the various new lending programs.

So once the FOMC is ready to start raising rates again, it may want to see the balance shrink in size by having some of these programs wind down.

The district presidents on the FOMC are also important because they act as the Fed's eyes and ears to banks and businesses throughout the country. Given the economic crisis, former Fed governor Lyle Gramley, who is now an economist with the Stanford Group, said it's more important than ever to have the FOMC discussing policy changes.

"Until we get clear evidence that the economy is turning around, things are going to stay very hectic at the Fed," he said.

Other economists say its clear that Fed Chairman Ben Bernanke wants to keep the Fed's district banks involved in various programs, such as the soon-to-be-implemented plan to back $200 billion in consumer and business loans.

It's also important to have the Fed speaking with one voice on the need for action, rather than having Fed presidents roaming the country criticizing actions by the Fed's governors.

"The fact that the board can do these things without consulting with the bank presidents doesn't mean they should do it that way," said David Wyss, chief economist for Standard & Poor's. "They want to make sure everyone is reasonably informed, but also that there is a consensus that they're doing it right."

Watching what the Fed says

Few expect any new program to be announced Wednesday. Instead, economists will be looking at the language in the Fed's statement for clues the Fed might send about its next policy step.

"At some point, it seems that they'll have to offer a clearer view of what comes next," said Tom Schlesinger, executive director of the Financial Markets Center, a think tank that follows the Fed.

For example, Wyss said that if the Fed includes a mention of the problem caused by troubled assets now held by banks, it will be taken as a signal that the Fed is close to announcing a so-called "bad bank" program to purchase toxic assets.

But Wyss cautions that despite the attention every word and comma in the statement is likely to receive, there probably will be far less concrete information than hoped for by economists and investors.

"People will be picking [the statement] apart because they don't have anything else to analyze," said Wyss. "But that doesn't mean they'll learn anything." To top of page

Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
Want to buy -- and live in -- a piece of history? It's not that far out of reach. These historic homes are not only for sale, they are incredible bargains. More
5 ways retailers are tracking you If you think pesky salespeople are invading your personal space, check out these 5 technologies that are tracking your movements throughout a store. More
Moto X vs. Droid Turbo: Which Droid should you buy? Motorola has made the two best Android smartphones this year. Here's how they stack up. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.