6 Tools Left in Bernanke's Toolbox as QE2 Ends
NEW YORK ( TheStreet) -- No one expects Federal Reserve Chairman Ben Bernanke to pull a rabbit out of his hat after quantitative easing ends today, but he may still have a few tricks up his sleeve if the economic picture fails to improve.
For now, the Fed is set to sit tight. Along with investors, Bernanke is looking for a silver lining in economic data. If this summer's numbers turn bleaker, then Bernanke's team will be forced to go back to the drawing board, that is, if it hasn't already done so. Bears will of course say, "I told you so."
Traditionally, the central bank has three tools for monetary policy -- buying and selling treasuries in the open market, setting the discount rate and dictating reserve requirements -- all of them blunt at best.
We stretched our imaginations to find the leftovers in Bernanke's toolbox. Not surprisingly, the following list comes with big caveats from analysts. And don't forget, Bernanke has his own warning too: "All of these things are somewhat untested."1. Cut the interest rate on excess reserves The current rate that the central bank pays banks holding more deposits than required is 0.25%, about the rate at which banks lend to each other. If the Fed lowers the rate on excess reserves, the mechanics say that banks should loan out more, both to each other and to the public. Can this work?
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