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Fed meets today

By Holden Lewis · Bankrate.com
Tuesday, September 21, 2010
Posted: 8 am ET

The Federal Reserve's rate-setting committee meets today. The Fed will keep short-term interest rates near zero percent. If there's any suspense in today's meeting, it involves whether the central bank will promise to shower more cash upon the economy to stimulate buying and, therefore, employment.

Consumers aren't spending. The result is joblessness. The federal government has ways to fight unemployment and reluctance to spend: It can hire people to fix roads, and give money to states so local governments can avoid laying off teachers and garbagemen. And the central bank can cut interest rates to encourage people to borrow and spend. Both of these methods have been tried, and few people have been satisfied with the results.

The Fed has another arrow in its quiver. It can buy mortgage-backed securities and U.S. Treasury notes. When the Fed buys these debts, it pays cash for them -- cash that circulates through the economy. This is designed to do a number of things. It depresses interest rates, so consumers and businesses find it cheaper to borrow and spend. On the flipside, low interest rates punish savers, presumably spurring them to spend. And as more cash chases the same amount of goods, prices rise, and people buy now, before prices go up later. At least, that's how it's supposed to work.

When the Fed buys mortgage-backed securities and Treasuries, it's a form of economic stimulus called quantitative easing. The Fed did it last year and into this spring. Now observers believe the Fed will try a second round of quantitative easing -- "QE2," in the lingo of people who spend their workdays thinking about this stuff.

Will the Fed announce QE2 at this meeting, or at the next one, in early November? That's what observers are asking. I think they'll wait until the November meeting, which occurs right after the midterm elections. The central bankers don't want to be accused of meddling in the elections, and it would look kind of funny to start a second round of quantitative easing the day after economists announce that the recession ended 15 months ago.

I'll be interested to see the effect of QE2 on mortgage rates. I just don't see them going much lower, even if the Fed pays top dollar for new mortgage-backed securities.

Here at Bankrate, we'll post a story about the Fed's decision shortly after it's issued. After that, we'll have my translation of the Fed's policy statement. The Fed's decision comes around 2:15 eastern time.

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