The Federal Reserve has absolutely no flexibility in what it can and cannot do tomorrow, January 28.
The result of its two day meeting, begin today, is entirely predetermined by circumstance.
It cannot change the Federal Reserve rate from the target rate that it set in its December meeting of zero to 25 basis points. There obviously is no flexibility to lower the rates further, and since raising rates right now would undo any progress that is being made to opening credit markets, that outcome isn't really available either.
Many observers have suggested that the Fed would announce that it is going to make open market purchases on the long end of yield curve (out more than 10 years). However, with the 10 year bond already yielding only 2.60%, such a move would artificially upset the bid-ask along the Treasury yield curve, removing the natural bidders for an extended period. It would therefore be a terribly unwise move for the Fed to make when Treasury is going to need to go out and sell tremendous amounts of debt to fund TARP and Obama's initiative. It would also lead to a dramatic fall in the dollar which would further damper demand for USD denominated paper. They are too bright for this.
Expect nothing tomorrow.
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