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Fed Stands Ready to Act Sooner Than Later, Market Shrugs

Aaron Task
Editor in Chief
Daily Ticker

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The Fed is coming! The Fed is coming!

Renewed hope the Fed will take additional action to stimulate the economy helped pare the market's loss Tuesday and contribute to a modest rally Wednesday morning -- which had dissipated by 11:00 a.m. EDT.

"Amid the recent wave of disappointing economic news, conversation inside the Fed has turned more intensely toward the questions of how and when to move," writes Jon Hilsenrath in The WSJ.

Another round of quantitative easing (QE), focused on buying mortgage-backed securities, is the most likely action the Fed would announce. In addition, the central bank could extend its commitment to keep rates at zero beyond 2014 and/or directly extend credit to banks via the discount window to spur lending, The WSJ reports.

The New York Times had a similarly themed article, suggested a concerted effort by the Fed to jawbone the market after three days of triple-digit declines and renewed concerns about Europe's debt crisis.

The fact the Fed stands at the ready to take action is neither new or particularly newsworthy. During his Congressional testimony last week, Fed Chairman Ben Bernanke reiterated the Fed's pledge to "take further action as appropriate to promote a stronger economic recovery."

What's (arguably) new and newsworthy is the idea the Fed might step up its timetable for more action. The FOMC's next policy meeting is July 31-Aug. 1. Until now, most Fed watchers expected the central bank would wait until its mid-September meeting before taking additional action because it would then have two more months of data on jobs, retail sales and other economic indicators.

That is still the most likely outcome but the Fed has put the market on notice that it may move sooner than expected, rather than waiting to see the whites of the recession's eyes.

The global economy is clearly slowing and the Fed rightly fears Congress is part of the problem vs. the solution, so it's understandable that the central bank is considering doing more and potentially on an accelerated timetable.

But the big issue here is that it seems like each Fed action is having a smaller impact on the market than the last. More importantly, extraordinary Fed action in recent years has had a limited impact on the "real" economy, at best, and it's unclear more action now (or soon) will have any different result.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com