Pressure grows for Fed to act as stocks plunge

It's still a remote possibility, but one that becomes increasingly more plausible with every tick lower in plunging global stock markets.
While most analysts still expect the Federal Reserve to not make any major changes in policy at its meeting on Tuesday, some are beginning to wonder whether the market disruptions of recent sessions warrant some kind of central bank intervention.
U.S.stoks extended last week's rout on Monday, with the Dow Jones industrial average tumbling down more than 5.0 percent for the day late afternoon, following Friday's historic downgrade of the U.S. AAA credit grade by ratings firm Standard & Poor's. U.S. stocks saw their biggest one day drop since December 1, 2008 during the worst of the financial crisis of that year. Bank shares were severely punished, raising fears of a new financial crisis, though the Fed said Friday night that the S&P downgrade of the government's rating would have no effect on bank capital ratio regulations.

"If the Fed does nothing, it could prove to be a disappointment at this point," said JP Morgan analysts on a conference call to discuss the S&P downgrade.
Many economists argue the Fed's policy toolkit is already severely depleted. Interest rates are effectively zero, and the Fed's bloated $2.9 trillion balance sheet has raised concern among conservative economists and politicians.
Still, there are a few things the Fed could do to reassure markets, including to suggest that it will revise down its growth forecasts -- the first signal that it is leaning toward further policy accommodation.
The central bank might also decide to begin reinvesting proceeds of maturing bonds into longer-dated Treasury maturities, putting further downward pressure on long-term borrowing costs.
Despite the loss of the U.S. government's prized AAA credit rating from Standard and Poor's on Friday, a steep rally in U.S. Treasuries, on renewed fears of a global downturn, has pushed such yields to their lowest levels in two years, so it is unclear how much positive effect on the economy  any move by the Fed to lower rates would have.
Another move the Fed could make, but one that few expect, is another round of bond purchases. These are seen as controversial and only modestly effective, so policymakers will be reluctant to resort to them again.depends on how confident the Fed is in their own forecast,"economist at Wells Fargo.
At the moment, it was difficult to imagine that such confidence was very high. In June, the Fed forecast growth of 2.7 percent to 2.9 percent for 2011. But that was before the rate of first-half expansion was revised sharply downward, and the employment picture worsened.
Adding to concerns about the financial system, the latest rescue package from the European Central Bank, aimed at putting a floor on selling of Italian and Spanish bonds, was greeted with skepticism among investors.
Fed officials have noted that, while U.S. bank exposure to smaller European nations like greece  and Portugal is relatively minor, there is a certain contagion risk from their holdings of vulnerable European banks.