Today's Coming Crisis Movie

Wednesday, August 10, 2011

After 635-Point Sell-Off, Federal Reserve Running Out of Options

The Dow Jones Industrial Average fell by 635 points Monday, Asia followed suit and Europe is expecting losses of up to 6 percent following the downgrade of U.S. debt by ratings agency Standard & Poor’s.

Whether the move by S&P can be wholly blamed for the heavy selling of stocks is open to question, but the market is now asking how the Federal Reserve [cnbc explains] will react when it meets today to discuss its response at its monthly meeting.

Last month, Fed Chairman Ben Bernanke outlined four actions he could take: More quantitative easing [cnbc explains] ; cutting interest on excess reserves; buying longer-dated bonds; or giving guidance on when he will begin to shrink the Fed’s balance sheet. Following the huge losses for stocks since late last week, the Fed's Federal Open Market Committee (FOMC) will on Tuesday have to take all options very seriously.

“Judging from the experience with (the second round of quantitative easing, or QE2), another round of asset-purchases might be the Fed’s best option to resuscitate the stock market in the short-term,” Harm Bandholz, the chief U.S. economist at Unicredit Research, said in a note to clients following what he described as “Black Monday.” (more)