Investors have concluded that the Federal Reserve will announce new measures to promote economic growth after a meeting of its policy-making committee ends Wednesday. Long-term interest rates have moved as if the Fed had already spoken.
The central bank is often described as facing the choice of whether to do more to improve the economy. But the anticipatory behavior of investors means the Fed really faces a slightly different choice, one it has confronted often in recent years: whether to risk doing less than expected.
The overriding argument for action is the persistent weakness of the American economy, which has left more than 25 million Americans unable to find full-time work.
The Federal Reserve chairman, Ben S Bernanke, who has made a series of unusual efforts to revive growth, has not discouraged speculation that he is ready to try again.
?I think the Fed has no choice but to act,? said Krishna Memani, director of fixed income at Oppenheimer Funds. ?If the Fed
were not to do anything having built market expectations to
a pretty decent level, I think the markets would react quite negatively to that.? But the Fed also faces mounting pressure against additional action, including strident criticism from Republican presidential candidates and divisions in the policy-making committee. Moreover, the options available to the central bank have less power to generate growth, a greater chance of negative consequences, or both, than those it has already tried.
Some close watchers of the central bank say investors? behavior could let the Fed offer a token gesture now, postponing any larger move at least until its next meeting in November. After all, the Fed is reaping the benefits of action without the costs.
?There is no reason for the Fed to rush,? Lou Crandall, chief economist at Wrightson/ICAP, wrote in a recent note to clients predicting such an outcome. ?It is in the Fed?s interest to milk the anticipation effect as long as possible.?
The move markets are anticipating is a new effort to reduce long-term interest rates, which would allow businesses and consumers to borrow more cheaply. Yields on the benchmark 10-year Treasury note fell to a record low of 1.88 percent at the start of last week, reflecting the Fed?s earlier efforts to lower rates and investors? pessimism about the economy.
The hope is that an additional reduction in rates will provide a little more encouragement for companies to build factories and hire workers and for consumers to buy cars and dishwashers.
The Fed has held short-term rates near zero since December 2008, by increasing the supply of money.