There’s not much “regular” about Tuesday’s regularly scheduled meeting of Federal Reserve policymakers in Washington. As they say at the anti-war demonstrations in the nation’s capital, the whole world is watching.
At stake, if you believe the buildup by financial analysts and traders, is much more than the next blip in interest rates.
According to much expert opinion, the Fed’s action and statement, due for release early in the afternoon, will enhance or diminish public confidence in the global financial system and the Fed as the primary institution of that system.
But as of late Monday, you could still make a bet on or get up an argument about whether any of several choices facing the central bankers would help or hurt.
“I don’t know what they are going to do,” said David Oser, senior vice president for investments at Chicago’s ShoreBank. “There is much more question about this meeting than any in years. People will be glued to their terminals.”
The Fed’s principal weapon in fighting recessions, on the one hand, and inflation, on the other, is its ability to set short-term interest rates. The current rate of 5.25 percent has been in place since June 2006. The last time the Fed reduced its target rate was June 2003, when it was cut to 1 percent.
Tuesday’s meeting, the sixth of eight scheduled for 2007, is the first since a global credit crunch erupted in August. On Aug. 17, the Fed, after an unscheduled meeting, responded to the crisis by trimming a special rate, called the discount rate, it charges banks for emergency loans to 5.75 percent from 6.25 percent. But the rate on overnight loans between banks, called the federal funds rate, stayed at 5.25 percent.
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Prospects for a recession or worsening inflation are uncertain and debatable. Nonetheless, at least three opportunities for additional action confront Fed policymakers Tuesday: the fed funds rate, the discount rate and the statement typically issued after Fed policy meetings.
Most analysts expect news on all three fronts, led by at least a quarter-percentage-point cut in the fed funds rate. But despite recent efforts by the central bank to telegraph its punches, nothing is certain about Tuesday’s meeting and its aftermath.
Here are a few sidelights to the Fed meeting drama worth watching:
*It’s by no means clear whether your ability to obtain a mortgage, even with a large down payment and excellent credit record, will improve anytime soon, no matter what the Fed does.
The business of providing mortgage loans and other forms of credit is undergoing a rapid retrenchment. Late Monday, online financial-services giant ETrade announced it would exit the wholesale mortgage business. Already, scores of mortgage originators have gone bust or folded their tents.
Those on Wall Street pressing the Fed to cut rates are primarily seeking the Fed’s help to make this retrenchment easier, not to make mortgage loans more available. The result should be fewer lax and abusive mortgages. But recovery in mortgage lending and housing remains a distant goal.
*One effect of the current unrest in financial markets that gets little attention is the potential impact of Americans’ weak inclination to save rather than borrow.
The low U.S. savings rate helps explain why financial engineers have developed exotic global markets in mortgage-backed securities and other debt-linked securities to raise money for borrowing by U.S. consumers and businesses.
Cash flow into equity mutual funds has languished. Commercial banks, suddenly in need of traditional consumer deposits, are advertising teaser rates on deposits rather than teaser rates on loans.
A boost in consumer savings is not necessarily assisted by the lower interest rates Wall Street is demanding from the Fed. People on fixed incomes typically prefer higher interest rates. But a signal by the Fed on Tuesday that economic stress has emerged could change attitudes about saving.
Until now, financial-services providers have been more creative at providing convenient and low-cost ways for people to borrow rather than to save, noted Tom Roseen, senior research analyst at mutual fund tracker Lipper.
“Americans have been over overspending their income for some time, and now we’re feeling the effects,” he said. “The earn-and-spend attitude that we have in the United States is a problem.”
*Former Fed Chairman Alan Greenspan could not have picked a better time to be out promoting his memoir, “Age of Turbulence.”
But the enthusiastic armchair analysis now under way pitting Greenspan against his successor, Ben Bernanke, is likely to make matters worse for practically everyone else.
Injecting personality into public understanding of important institutions can be helpful, but only in small doses.
Greenspan typically is described as a pragmatist, willing to act preemptively on behalf of the economy and financial markets. Bernanke is regarded as a more ivory-tower academic type, reluctant to take action before economic evidence shows the way.
“For better or worse, we’ve put ourselves in a position where we need to have confidence in our central bank,” said Oser. “You have confidence in institutions that are decisive, that recognize crises and deal with them the best way they can.”
Tuesday afternoon, Bernanke will know he’s successful if the buzz focuses on what the Fed did and not on Greenspan’s reaction to it.
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