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Wall Street to Fed: No surprises, please

September 23, 2009 |  6:00 am

There is not the proverbial snowball’s chance that Federal Reserve policymakers today will announce a boost in short-term interest rates from their near-zero emergency levels. That much all of Wall Street can agree on, no matter how strong an economic rebound some analysts might expect in the current quarter.

But what about the alphabet soup of Fed lending programs -- AMLF, TALF, CPFF, etc. -- aimed at funneling cash directly into various corners of the financial system?

Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y., asserts that the Fed is unlikely to signal in its post-meeting statement any retreat from current policy.

From Shepherdson’s note to clients today:

"We would be amazed to see anything in the statement that even resembles a hint that the Fed is preparing to withdraw any of the net monetary support to the economy. Some specific programs have been wound down . . . but total Fed support for the system continues to increase.


"To reverse course now, or to signal that such a shift is imminent, would be potentially ruinous, as Mr. Bernanke fully appreciates. The second-worst policy mistake that authorities can make in a massively over-leveraged economy is to tighten too early. The worst, by the way, is to allow the uncontained failure of commercial banks.

"The U.S. tried the early tightening route in the 1930s and Japan tried in the 1990s, with disastrous results both times."

And with the Dow Jones industrial average within easy walking distance of 10,000 again, the Fed has every reason to want to keep Wall Street happy by keeping the money flowing. A rising stock market can't assure an economic recovery, but it can't hurt, either.

Still, the central bank at its August meeting indicated that one major funding program would come to a close by the end of October: the Fed’s open-market purchases of Treasury securities, aimed at putting downward pressure on Treasury note and bond yields.

The Fed has purchased $289 billion of Treasuries since March, nearing the full amount of the $300-billion commitment it made back then.

Policymakers could decide to expand and extend that program, but Fed officials haven’t telegraphed that they’re considering that. In theory, then, the Treasury market -- which is absorbing another $112 billion in new government note issuance this week -- should be prepared for the Fed to affirm today that its purchases will end as scheduled.

If the market instead reacts badly, it will be a frightening sign of just how dependent Treasury bond investors believe they’ve become on the Fed’s largesse.

-- Tom Petruno

Photo: The Fed's headquarters in Washington.