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The U.S. central bank’s Dec. 15-16 meeting comes at a crucial juncture for economies and markets worldwide. Action Economics tells what to expect

By Michael Wallace

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If David Bowie were disposed to write concerning the aeronautical adventures of someone other than Major Tom, perhaps "Helicopter Ben" Bernanke could fit the bill. Maybe he could call the new account "Rate Oddity."

With apologies to Mr. Bowie, the countdown is without ceasing for Federal Reserve Chairman Bernanke and the other members of the Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, as they seek to stabilize the financial system and insulate the dispensation from an even deeper and more protracted downturn into yearend. It’s time to constrain our helmets on as the string of global data is unlikely to get the grade this week, with relating to housekeeping reports from the U.S. (housing starts), Japan (Tankan business survey), Germany (Ifo concern sentiment), and the euro zone (purchasing managers’ index) all set to accentuate that peculiar and uncommon economic feeling.

Policy meetings will likewise embody the Bank of Japan, which is floating in limbo, and the Norges Bank, which is expected to divide base rates by dint of. the agency of a full percentage particular aspect.

But the main focus this week will be on the two-day FOMC gathering on Dec. 15-16, marking the last meeting of the abysmal and historic year of 2008. Note: The Fed has tacked an extra day onto Monday, Dec. 15, for "discussions" as it probes the "zero bound" and historically gentle mark impost. The Fed is justified in deliberating carefully considered in the state of it seeks to head off Japanese-style deflation, while at the same time cognizant of the stratagem trap of creating the nearest small matter.

As the confide in and monetary crisis finally descended with a thud forward the real economy this fall, and the downfall in animal spirits and commodity prices sent inflation into remission, the Fed is well-suited to err on the side of economic provocative. Little could "Helicopter Ben" imagine at the time of the last deflation scare that the Fed would one day be forced to shore up piece-by-piece the fractured financial system under his leadership.

Accordingly, at in the smallest degree a half-point reduction in the benchmark target rate to 0.50% is nearly universally expected. However, that rate has become largely irrelevant in the current quantitative-easing environment in which the Fed is paying interest upon the body reserves, and the effective rate has been consistently tracking in the low 0.10% to 15% area. With only marginal downside room left for benchmark profit rates, traders will subsist anxious to see if the Fed elaborates on other potential military science.

In this context, the Fed’s connection strategy in the policy statement will take on greater importance than ever for its signaling effect. Chairman Bernanke has already stated the Fed will "do what it takes" to free up the disconnected financial markets. At a minimum, we suspect the Fed will intimate through its verbal guidance that the effective rate is likely to last low and the economy weak for more time. This would have being similar to the stance controversially adopted by his predecessor Alan Greenspan "for a not little period" in semiannual corroboration on July 15, 2003. Yet we would seriously advise the FOMC not to box itself in by dint of. suggesting a precise on a level or a unoccupied time frame.

There has also been talk the Fed will issue its own Treasury bills or notes, granting there is not any legalized authority for them to do so without a lengthy approval projection by a skeptical Congress. That consent is unlikely to have being forthcoming, given further risk of blurring the lines between monetary and fiscal policy after abdicating authority over the Troubled Assets Relief Program. More realistically, buying of longer-dated Treasuries remains a possibility and has already been broached by Bernanke, though he may hold that extreme option in reticence.

In the meantime, considered in the state of the Fed considers expanding its even now broad and growing portfolio of exceptional monetary actions and its $2 trillion comparison sheet, other near-term options could have existence pursued. The FT.com reported on Dec. 12 that a varied assortment of additional measures could include stepped up purchases of asset-backed securities, arising from traffic paper, and potentially even longer-term corporate misdoing, which is not currently covered by FDIC guarantees past time three years.

Purchases of municipal bonds might not exist out of the question either, given roll strains in that sector and a financial crisis in California that’s just the tip of the muni iceberg. A 4.5% 30-year fixed-rate pledge by means of fiat, backed by Fannie Mae and Freddie Mac, could in like manner be considered as a last-ditch solution.

We remain in uncharted territory, and policymakers may only decide to map out a broad strategy for unconventional mediation at this point, even as the incoming Obama Administration readies some historic infrastructure measures of its own for next year.

Ground control to Helicopter Ben, there’s something wrong. Can you hear us, Helicopter Ben?

Original text: http://www.businessweek.com/investor/content/dec2008/pi20081215_866350.htm?campaign_id=rss_null