Federal Reserve may react to stock plunges, struggling economy - KWWL - Eastern Iowa Breaking News, Weather, Closings

Federal Reserve may react to stock plunges, struggling economy


A plunging stock market and a stalled U.S. economy may force the US Federal Reserve to use the dwindling number of tools it has left in an effort to boost growth and keep the country from sliding back into recession.

At the very least, the central bank is expected to acknowledge all the adverse things that have occurred since its policymaking committee last met in June.  But many private economists say they believe that the situation has grown so dark in recent days that Federal Reserve Chairman Ben Bernanke and his colleagues will be forced to do more.

On Monday, the Dow Jones industrial average suffered its sixth-worst point drop in history, falling 634.76 points.  That decline came after credit rating agency Standard & Poor's on Friday downgraded the United States' long-term debt because of what it saw as political gridlock that is preventing Washington from making meaningful cuts in the country's soaring budget deficits.

"I don't think the Fed can stand by," said Mark Zandi, chief economist at Moody's Analytics. "This is a crisis of confidence and the Fed needs to shore up confidence."

Many analysts expect the Fed to choose among a menu of options that Bernanke laid out in his mid-year testimony to Congress in July.  Among the options Bernanke discussed was providing a clear indication in the Fed's statement about how long the central bank intends to keep interest rates at record lows.   More explicit language on interest-rate policy might boost investors' confidence at a dangerous moment for the global economy.

Many investors would like to see the Fed launch a third round of bond buying.  But the program has triggered a sharp debate inside the Fed about whether further bond purchases could set the stage for inflation down the road.


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