Following the Dow's 600-point free fall today and Friday's S&P downgrade, the Federal Reserve may take measures to strengthen investor confidence, reports Bloomberg. Fed chief Ben Bernanke may prolong a monetary stimulus by "making a commitment to hold the Fed's $2.87 trillion balance sheet steady for an 'extended period,'" reports the news service. "The Fed also may replace shorter-term securities with longer maturities to reduce rates on longer-term debt." Beyond that, the Fed could simply hold its key interest rate near zero and specify the date it will hold the rate until. According to The Wall Street Journal, investors are now turning their attention to tomorrow's U.S. Federal Open Market Committee meeting where the fed will prescribe remedies for the U.S. economy. “It won’t be a boring meeting,” Lawrence Creatura, co-portfolio manager for Federated Clover Investment Advisers, tells Market Watch. Is intervention the road the central bank should take?
It could help "Those steps are all about bolstering confidence," said Michael Feroli, chief U.S. economist at JPMorgan Chase to Bloomberg. "It wouldn't do tons to alter economic and financial conditions, but the perception that the Fed will act and do something is reassuring."
There's an inflation risk "The Fed could lower the interest rate it pays banks on excess reserves, forcing banks to lend the money to obtain higher rates of return," reports Reuters. "[But] after the Fed's $600 billion second round of quantitative easing, or QE2 as it became known, commodity and energy prices soared worldwide. The Fed was blamed for fueling inflation although Chairman Ben Bernanke and other economists argued rising demand around the world was the principal cause of rising prices."