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World crisis: Will the Federal Reserve act?

Federal Reserve
Highlights
  • Since the last Fed meeting in November, economic data has been mostly positive.
  • While the U.S. economy has improved, the eurozone situation remains unclear.
  • The Fed may target mortgage-backed securities in future stimulus moves.

The Federal Open Market Committee, also known as the FOMC, meets Tuesday for the last time this year, and Fed watchers expect a lot of talk but no action from the rate-setting committee.

Though the Federal Reserve's meeting is sure to be packed with nuanced discussions of domestic and international monetary policy in this tumultuous time, no significant changes or announcements are anticipated from the December meeting.

If anything unusual comes out of the FOMC this time around, it could be in the form of a long and comprehensive statement following the meeting in an effort to increase transparency and enhance communication.

Economy shows signs of life

Despite forecasts of a double-dip recession, the economic data following the last Fed meeting have been generally positive, which portends a quiet Fed meeting while the world waits with bated breath as the European debt crisis plays out.

"If you look at the Beige Book and the pieces of information coming out on the U.S. domestic economy, things seem to be moving in a positive direction," says Robert A. Eisenbeis, chief monetary economist at Cumberland Advisors in Sarasota, Fla., and former executive vice president of director of research at the Federal Reserve Bank of Atlanta.

Additionally, the Bureau of Labor Statistics released the nonfarm payrolls for November, which showed a decrease in the unemployment rate. By most accounts, it was better than anticipated.

"We're starting to see turnarounds in a lot of things, and that is encouraging. That limits the possibility of them announcing some big purchasing plan, though they will do behind the scenes whatever they need to do to facilitate credit markets," says James Kee, president and chief economist at South Texas Money Management in San Antonio.

Eye on Europe

Though the U.S. economy has recently seemed to regain some footing, the situation in the eurozone has dragged on. That has prompted fears of contagion in the absence of a workable deal to resolve the crisis.

To prevent that potential outcome, six central banks banded together Nov. 30 to provide liquidity to European banks through temporary dollar-swap arrangements, in effect briefly making it cheaper for European banks to borrow U.S. dollars.

As the swap lines pose little risk to the Federal Reserve itself or to the U.S., the international efforts by the central bank could curtail any potential fallout from foot-dragging on the part of the Europeans.

The big risk is a disorderly default or dissolution of the euro or the European Union, but the desire to bail out the neighbors across the pond is limited.

"They may have a little window-dressing getting over the year-end, maybe an additional swap arrangement to handle any liquidity needs at the end of the year, but I think, other than that, you won't be seeing much else from the Fed," says Wilmer Stith, CFA, portfolio manager of MTB's Intermediate-Term Bond Fund.

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