Skip to main content

FOMC Likely to Stand Pat on Rates

As investors wonder whether the Federal Open Market Committee will determine that additional easing policies are needed, some market watchers say that it could do more harm than good at this point.

WASHINGTON (TheStreet) -- The Federal Open Market Committee will likely keep rates at near-zero levels and dilute its assessment of economic conditions when it releases its statement on Tuesday afternoon, but market watchers are less certain regarding whether the Federal Reserve's policy-setting arm will determine that additional easing measures are needed to sustain the recovery.

Although the Fed let accommodative monetary policies expire this year, recent weak data has some market watchers worried that the recovery is flailing. The government's

July jobs report

, which said the U.S. economy lost 131,000 nonfarm payrolls in July, after shedding 221,000 jobs in June, only furthered those concerns, as did recent comments by Fed Chairman Ben Bernanke.

In his semiannual monetary policy report in late July, Bernanke described the economic outlook as "unusually certain" and noted that some policymakers consider risks to growth as more heavily weighted to the downside.

Federal Reserve Board Chairman Ben Bernanke

At the FOMC's last meeting on June 22-23, committee members upheld expectations for a moderate recovery and said that while additional accommodative policies weren't needed at the time, they "would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably," according to minutes from the meeting.

Economists seem to agree that some downward adjustment to growth expectations may be warranted but that the reintroduction of quantitative easing could do more harm than good at this point.

Pointing to higher stock prices, a lower dollar and some tightened credit spreads since the FOMC's last meeting, Deutsche Bank Chief U.S. Economist Joseph LaVorgna said the recovery -- while sluggish -- is still on track, which "will embolden the Fed to keep policy on its present course."

"Other than implicitly marking down its near term growth outlook, we expect the tone of the FOMC to not be substantially different than in June," he added.

Scroll to Continue

TheStreet Recommends

UBS economic Maury Harris described recent data as "disappointing" but "not disastrous" and said no significant changes to the FOMC's statement are expected.

"The latest batch of economic data was mixed and insufficient to alter our forecast for 3% real GDP growth in 2010 and 2011. However, the jobs data do underscore our recent view that risks are slightly skewed on the downside for 2010," Harris said, adding that current conditions aren't dire enough to warrant further stimulus, which would only increase the market's concerns.

"It's a double-edged sword," said Ralph Fogel, head of investment strategy at Fogel Neale Partners. "On the one hand, it shows that the Fed is willing to do something -- and they need to since every monetary measure is declining -- so it shows that they're taking steps, but it could also increase fear in the marketplace."

"Whether additional easing comes tomorrow or in September, it appears to me at the moment that there's a better-than-even chance that this is going to happen. Based on the data that's been coming out, it's apparent that the private sector isn't holding itself up and so the Fed is going to have to step in," he said.

The FOMC will release its rate decision statement at 2:15 p.m. ET, on Tuesday, Aug. 10.


Written by Melinda Peer in New York


Readers Also Like:

>>Earnings Watch: Stocks Under $5

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.