Fed steps likely to move markets

Federal Reserve policy makers meeting today may find the market reaction to any announcement of steps to spur growth will be bigger than the impact on the economy.

Options outlined last month by Fed chairman Ben Bernanke include providing more information about the Fed's pledge to maintain record-low interest rates, reducing the rate it pays on banks' reserve deposits and sustaining or expanding the size of the balance sheet.

"If they're small scale, the direct effects are relatively small," said Marvin Goodfriend, a former research director at the Richmond Fed.

"But to the extent that they signal the Fed's concerns and what direction they are, and the Fed's willingness to take actions given the signal of their concerns, they could have big effects."

Investors would see new Fed efforts as foreshadowing more dramatic steps to come, including large-scale asset purchases, said Goodfriend, a professor at Carnegie Mellon University's Tepper School of Business in Pittsburgh.

Weaker job gains at US companies since April and a slowdown in growth last quarter are among signs the recovery is stalling, increasing pressure for more Fed easing.

Bernanke said last month that the central bank wasn't ready to take any action in the "near term".

At the same time, his assessment that the "economic outlook remains unusually uncertain" alongside weak data on housing and manufacturing, have fuelled speculation by some economists the Fed will take steps as soon as today.

Policy makers probably aren't ready to indicate they've "hit the panic button" by taking steps today, said Mitch Stapley, chief fixed-income officer for Fifth Third Asset Management.

Should it decide to do so, "risk-based assets [would] probably fly", including stocks, corporate bonds and high-yield securities, while bond yields may decline, he said.

"That would be the first salvo" by the central bank toward bigger actions, said Stapley.

Central bankers won't cut their outlooks enough to warrant an immediate shift in policy, says former Fed Governor Laurence Meyer, vice-chairman of consultant Macroeconomic Advisers.

Economist Lou Crandell said: "The Fed may look for market-friendly ways to adjust the language of its policy statement, but we think it is unlikely to make any structural changes to its operations at this meeting."

- BLOOMBERG