WASHINGTON — Anticipation is high that the Federal Reserve will announce some new step Wednesday to try to rejuvenate the U.S. economy and boost investor confidence.
One option would be an effort to drive long-term interest rates even lower to try to spur borrowing and spending. A more modest step would be for the Fed to stress its readiness to do more should the economy weaken further. Or the Fed might do or promise nothing further.
Wall Street rallied Tuesday on hopes the Fed will say when its two-day meeting ends Wednesday that more help is planned.
Chairman Ben Bernanke and other Fed officials have acknowledged the slumping U.S. economy and the threats posed by Europe's debt crisis. At the least, analysts expect the Fed to say or unveil something to signal it's willing to provide further support.
The Fed has kept its key policy lever, the federal funds rate, at a record low near zero since December 2008. And it's said it plans to keep it there until at least late 2014.
It can't cut short-term rates further, so the Fed has tried to reduce long-term rates by buying more than $2 trillion in Treasury bonds and mortgage-backed securities. The idea is for those lower rates to boost spending, hiring and economic growth.
Bernanke has sent no clear signal of the Fed's next move.
Here's a look at the Fed's options, in order of their perceived likelihood:
Extend Operation Twist. Under Operation Twist, the Fed has been gradually selling $400 billion in short-term Treasury securities since September and using the proceeds to buy longer-term Treasurys. In doing so, the Fed seeks to “twist” long-term rates lower relative to short-term rates.
Operation Twist could potentially lower long-term rates without expanding the Fed's record-high portfolio. When the Fed expands its portfolio of investments, critics argue it raises the risk of high inflation later.