The U.S. Federal Reserve this week is likely to restate a vow to do whatever is needed to battle the nation's severe recession but no new steps are expected as it keeps its focus on plans already in the works.
Having pushed interest rates virtually to zero, the central bank has now committed itself to using its balance sheet -- its ability to pump money directly into stressed credit markets -- to stimulate economic activity.
The Fed's policy-setting Federal Open Market Committee meets on Tuesday and Wednesday. It will outline its thinking on how best to help the economy with rates already near zero in a statement around 2:15 p.m. (1815 GMT) on Wednesday.
With a number of programs to push money into the economy already in train, few Fed watchers expect the central bank to break new ground, although some expect it to underscore the degree to which it is expanding its support for the economy.
We expect the wording of the FOMC statement to be changed slightly to emphasize the likelihood that the Fed's balance sheet will increase significantly further in coming months, economists at UBS said in a research note.
The Fed will begin taking bids for loans this week under a program designed to spur student, auto, credit card and small business lending, and it continues to buy debt and securities issued by the government-backed mortgage finance agencies.
The consumer credit program -- the Term Asset-Backed Securities Loan Facility -- will initially aim to inject $200 billion into the market for securities backed by these loans, but it could be expanded to $1 trillion and widened to cover an array of mortgage-related debt.
Because of the sheer size of the TALF, we are certain that it will be the primary focus of the meeting and a significant element in the policy statement, said Joseph Brusuelas of Moody's Economy.com in West Chester, Pennsylvania.
FED POLICY CONSTRAINTS
The Fed also has committed to buy $600 billion in debt and securities issued by the government-backed mortgage finance agencies to help heal the crushed housing market.
Another tool the Fed has considered that could drive down mortgage costs -- buying longer-maturity government debt -- is unlikely to be unleashed unless yields on Treasury debt spike higher.
While liquidity in the Treasury market has not recovered to pre-crisis levels, it is a harder case to make that it is a 'severely' disrupted market, said Michael Feroli, a economist for JPMorgan Economics in New York.
Beyond those initiatives, the Fed's alternatives are less clear, and constrained by its obligation to maintain control of its balance sheet and avoid taking losses.
With the TALF, the Fed could move to support a wide range of troubled assets, but the riskier the asset, the more money the central bank would need from the Treasury to cover possible losses.
After a $700 billion bank bailout approved by Congress in October and a $787 billion tax-cut and spending bill passed this year to lift the economy, public resentment at the large tab taxpayers are picking up is growing more strident by the week, and it could be difficult for President Barack Obama to marshal support for more funds.
BALANCE SHEET EXPANSION
Expansion of the Fed's balance sheet, which has already grown to nearly $2 trillion from around $900 billion before the financial crisis intensified in the fall, also carries risks.
The central bank controls interest rates by buying and selling Treasuries with Wall Street firms, and the accumulation of other assets on its balance sheet will complicate its task when it no longer needs to support the economy so heavily.
The Fed has said it wants Congress to approve new tools that would help it shrink its balance sheet when the time comes to avoid an unwanted inflation, but lawmakers have yet to consider the matter.
It could potentially be more difficult to unwind these reserves under the expanded program, because of its greater size and also because the terms of the loans may need to be longer if the Fed expands it to allow the purchase of commercial (mortgage-backed securities) with longer maturities, said Goldman Sachs economist Alec Phillips.
Still, JPMorgan's Feroli said the central bank could announce expanded purchases of mortgage-related assets if it wants to avoid a perception it is being complacent at a time the economy is suffering from a severe recession.
The one factor that seems to unite all members of the FOMC: a desire to refute the notion that at zero rates, the Fed is out of ammunition, he said.