WASHINGTON — All eyes will be on the Federal Reserve today as it meets to weigh what else it can possibly do to reverse Monday’s steep slide in stocks and boost investor sentiment amid fears of Recession 2.0.

Along with central banks in Europe and Asia, the Fed had signaled over the weekend that it would intervene behind the scenes in currency markets if events warranted. But Monday’s global rout in financial markets – the worst since the economic crash of 2008 – appears to call for more dramatic action.

“After today, it’s a lot harder. They’re probably going to feel like they need to do something, but I don’t think they feel they’ve prepared markets to do much more,” said Vincent Reinhart, a former top economist at the Fed who is now a scholar at the American Enterprise Institute.

After steep sell-offs in Asia and Europe, the Dow Jones industrial average closed down more than 634.76 points at 10,809.85.

The dramatic declines, in the wake of Standard & Poor’s downgrade of its rating on U.S. credit, heightened pressure on President Obama and politically polarized congressional leaders to take action to prevent a double-dip recession.

The global plunge was triggered not only by the S&P downgrade after markets closed Friday but also by confusing signals from European leaders about addressing their mounting debt crises.

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The market volatility comes amid concerns that the U.S. economy might be heading back into recession. Year-over-year economic growth is under 2 percent – when that’s happened in the past it’s always meant recession.

It’s why there’s pressure on the Fed to announce something that would help keep the economy moving forward.

The Fed already has thrown everything but the kitchen sink at the economy since the crisis began – with interest rates at zero, it has few tools left.

In June, it ended a controversial program of $600 billion in bond purchases that was designed to force investors to take risks. Called quantitative easing, or QE2, it involved the Fed purchasing bonds to drive down their return to investors, forcing them into riskier bets on stocks and other financial assets.

Any bump that came from that effort has been erased by this year’s steep slide in stock prices, and it’s unlikely that the Fed will go down that path again. At minimum, the Fed is expected to signal that it will keep the zero interest-rate policy it has had in effect since December 2008 in place for a longer period of time than markets expected.

This move amounts to sweet-talking nervous markets.

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It’s unlikely that the Fed will announce a third round of quantitative easing, a QE3, because it doesn’t want to be “rushed into large-scale asset purchases,” Reinhart said.

The Fed isn’t the only one that appears nearly out of ammunition.

The political stalemate in Congress leaves out the chance of any new stimulus spending, and the administration already has tried tax credits for home- owners, car buyers and a cut in payroll taxes. What’s left is a question on many minds.

Obama again called on Congress to extend “as soon as possible” the one-year cut in Social Security payroll taxes adopted last December, saving taxpayers as much as $2,136 each this year. He also urged extending unemployment insurance for millions of idled workers to “put money in people’s pockets and more customers in stores.”

If Congress fails to act, the president said, “it could mean 1 million fewer jobs and half a percent less growth.”

House Speaker John Boehner, R-Ohio, repeated his entrenched position, focusing on cutting spending, not increasing it to bolster the economy.

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The gulf between the two seemed to underscore how difficult it could be for Congress to agree on another stimulus plan, even despite tepid job-growth numbers that are far below what’s needed to make a serious dent in the unemployment rate.

Not everyone is panicking.

“The stock market has predicted about twice as many recessions as we’ve actually had since World War II,” said Mark Vitner, managing director and senior economist at the Wells Fargo Economics Group. His firm still forecasts slow, steady growth in the U.S. gross domestic product of about 2.2 percent this year, and no recession.

 


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