This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

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?
  • "It should," says Steve Blitz, economist at ITG Investment Research.
  • "Looks promising," says Peter Cardillo, chief market economist at Avalon Partners.
  • However, just because banks might be more willing to supply money, lenders won't necessarily jump at the opportunity to borrow. The Fed can essentially toy with the "supply side," explains Blitz, but if a corporate America doesn't want the extra cash (and corporations do have a lot of cash sitting on their balance sheets already), then forcing more liquidity is pretty useless.

    2. Buy more securities and structure them differently

    Otherwise known as a third round of quantitative easing in disguise. The Fed has already said it will keep buying up long-term Treasuries in the months to come. Total purchases will likely add up to at least $300 billion. Investing in corporate bonds is still an option on the table. Albeit we were in quite different times during the housing bubble when the central bank dumped $1.25 trillion in mortgage-backed securities, we've learned that the Fed is ready to move on new methods when necessary.
    1 of 3

    Check Out Our Best Services for Investors

    Action Alerts PLUS

    Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    Quant Ratings

    Access the tool that DOMINATES the Russell 2000 and the S&P 500.

    Product Features:
    • Buy, hold, or sell recommendations for over 4,300 stocks
    • Unlimited research reports on your favorite stocks
    • A custom stock screener
    Stocks Under $10

    David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    14-Days Free
    Only $9.95
    14-Days Free
    Dividend Stock Advisor

    David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

    Product Features:
    • Diversified model portfolio of dividend stocks
    • Updates with exact steps to take - BUY, HOLD, SELL
    Trifecta Stocks

    Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

    Product Features:
    • Model Portfolio
    • Intra Day Trade alerts
    • Access to Quant Ratings
    Real Money

    More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

    Product Features:
    • Access to Jim Cramer's daily blog
    • Intraday commentary and news
    • Real-time trading forums
    Only $49.95
    14-Days Free
    14-Days Free
    AAPL $93.74 0.00%
    FB $117.58 0.00%
    GOOG $693.01 0.00%
    TSLA $240.76 0.00%
    YHOO $36.60 0.00%


    Chart of I:DJI
    DOW 17,773.64 -57.12 -0.32%
    S&P 500 2,065.30 -10.51 -0.51%
    NASDAQ 4,775.3580 -29.9330 -0.62%

    Free Reports

    Top Rated Stocks Top Rated Funds Top Rated ETFs