Market, Economy Waits for Bernanke and FOMC's Next Move

What will be the Federal Reserve's next move? Bernanke and the Federal Open Market Committee wrap up a two day meeting this afternoon. Faced with an economy that continues to post negative results and interest rates effectively at zero, theFOMC will need to rely on more creative moves to revive the economy.

Fed watchers are expecting the FOMC to announce more aggressive monetary expansion and quantitative easing. This is likely to mean that the Fed will continue buying Fannie Mae and Freddie Mac debt through their $600 billion program to buy mortgage bonds. Fed buying of these bonds would help keep a lid on mortgage rates.

Some analysts are also predicting that the FOMC could make an unconventional move to buy government debt.

Long-term treasury yields continue to climb on concerns about the waning foreign appetite for US debt, as they watch a US deficit that is growing to historic levels. The 10-year treasury yield fell yesterday showing some anticipation of such a move. The Bank of England instituted a similar strategy last money and effective drove down the yields.

However, this is likely to have less effect since treasuries still remain low, there still seems sufficient liquidity in the market, and the Fed would likely only be absorbing sell-off versus adding additional liquidity to the government debt markets.

Either approach is focused on reducing interest rates on mortgages, business, and consumer credit--injecting money into the system. The question is where is it most important to provide assistance.

The housing market continues to fall in aggregate value and mortgages are still defaulting at historic rates. This probably means the sure bet is on theFOMC to continue its focus on the mortgage crisis--increasing their purchases of MBS and agency debt.