Week ahead: All eyes on Fed meeting

NEW YORK — Will the stock market get more ammunition from central banks to go higher?

We will find out next week when Federal Reserve officials meet. They are widely expected to announce steps to prop up the ailing U.S. economy.

Any Fed action will come on the heels of Thursday’s bold program from the European Central Bank, which said it would buy bonds from countries such as Italy and Spain to ease their financial pressures and buy time to reduce their debt and reform their economies.

The Standard & Poor’s 500 index is up 14 percent this year. That’s thanks in no small measure to expectations building that the Fed will act. Friday’s tepid unemployment report provides the Fed with even more reason to act.

The Labor Department said employers added 96,000 jobs in August, fewer than experts had expected and the latest sign of weakness in the economy and poor prospects for the unemployed.

Many now expect the Fed to unveil a new bond-buying program at its meeting next week. The goal would be to lower long-term interest rates and encourage borrowing and spending.

While that may set off another rally in the stock market, strategists and experts question how much of a long-term effect it would have on the economy since interest rates are already so low.

David Kotok, the chairman and chief investment officer of Cumberland Advisors, believes that the very slow growth in the economy cannot be resolved by Fed action such as buying more bonds.

“Such a program will only send the 10-year Treasury note yield to 1.4 percent from 1.6 percent,” he said. “Short-term interest rates are near zero and can’t go any lower. Mortgage rates are at their lowest in a half century and it hasn’t changed the pace of growth. In fact, the longer low interest rates persist, it will lead to a decline in interest earnings for the savers, which is a dangerous trend, because it leads to more economic slowdown.”

Hugh Johnson, the chairman and chief investment officer of Hugh Johnson Advisors, said another bond-buying program won’t make a difference.

“What will do the trick? Nothing that the Federal Reserve can do,” he said. “The answer is that companies and individuals need to feel more optimistic about prospects, and that gets to tax and spending. If there was something dramatic to come out of Washington, such as a very sharp decline in tax rates and an increase in government stimulus, that might excite optimism and lead to more borrowing or spending or investing. But they’re not going to do something in Washington because they can’t agree.”

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