Range-Bound Market May Move after Fed

Jeff Kleintop TheStreet.com September 21, 2010

It may all come down to the Federal Reserve this week. The message from the Fed at 2:15 pm ET on Tuesday, Sept. 21 may hold the key to whether the stock market breaks out of the range that has bound the S&P 500 since May, or remains within it (see chart below).

During the past four decades, the Fed has cut rates one last time well after the recession had ended when a soft spot emerged. For example, the Fed cut the Federal Funds target rate in Sept. 1992 and June 2003 -- taking place about a year and a half past the end of the recessions of 1990-1991 and 2001. With rates effectively at zero, the Fed has told us it has three policy tools to boost growth if the outlook worsens: 1. Purchases of bonds to add more money to the system is called quantitative easing (QE) because it adds to the quantity of money in the system rather than lowering the price of money, or interest rates. 2. Modifying communication to suggest "extended period" means the Fed is on hold for an even longer period of time than currently believed. 3. Reducing the interest rate paid on excess reserves held by banks at the Federal Reserve in order to encourage them to lend the money rather than hold it at the Fed. Fed Chairman Ben Bernanke, in a recent speech, dismissed the last two options as less effective. Indeed, with the market not pricing in rate hikes until late next year anyway, the second option is unlikely to be effective. With the Federal Funds rate already near zero, the effect of the third option, in the Fed Chairman's own words, "would likely be relatively small" and poses the risk to "disrupt some key financial markets." The Fed has made its preference for the first option, QE, clear. The Fed took a small step in this direction at their Aug. 10 meeting when they committed to purchasing Treasuries as the housing debt they hold matures. The goal is to maintain its total securities holdings at about $2 trillion and avoid passively draining money from the financial system. Add Comment Tweet 1 2 Last » Next › var OutbrainPermaLink='http://www.thestreet.com/story/10866131/fed-may-hold-key-to-unlocking-range-bound-market.html'; var OB_Template = "thestreetcom"; var OB_demoMode = false; var OBITm = "1276003897985"; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ''; document.write(str); } adsonar_placementId=1341527;adsonar_pid=879768;adsonar_ps=-1;adsonar_zw=600;adsonar_zh=280;adsonar_jv='ads.adsonar.com'; Featured Photo Galleries var galljs = document.createElement('script'); galljs.src = 'http://js.thestreet-static.com/files/tsc/v2008/js/_1284585720500/min/pages/gallery.js'; var head = document.getElementsByTagName('head')[0]; head.appendChild(galljs); Go to Slideshow Archive Business News From The Web Mark Hurd's Truce With HP Forbes.com: Business News Ex-Physicist Leads Inquiry into Flash Crash New York Times Artificial Intelligence Goes Mobile BusinessWeek Online China's Biggest Car Maker Mulls GM Stake The Wall Street Journal. Bon Appetit leaving L.A. for NYC; Fairchild out as editor Los Angeles Times The Plight of Older Workers New York Times US recession 'longest since WWII' BBC Nokia Delays N8 Smartphone Delivery The Wall Street Journal. Irish Republic set for bond sale BBC Stock Buybacks Surge as Companies Borrow BusinessWeek Online More Headlines TheStreet Premium Services Compare All Services Jim Cramer's Action Alerts PLUS: Now any level of investor can trade right alongside a Wall Street pro — and enjoy 24/7 access to his portfolio! Learn More Login RealMoney Silver: Get Doug Kass's exclusive trading diary + 5 of TheStreet's top premium services including Action Alerts PLUS and RealMoney — all on one streamlined page. Learn More Login Stocks Under $10: Break into the market with small- and mid-cap stocks... all $10 or less! David Peltier tells you exactly which low-priced stocks he's buying and selling. Learn More Login OptionsProfits: Get 50+ trade ideas a week from the industry's top options experts. Plus — exclusive commentary on market trends and essential trading tools. Learn More Login Breakout Stocks: Find tomorrow's household names today. Bryan Ashenberg finds hidden gems in exciting up-and-coming markets that he believes are ready to break out! Learn More Login RealMoney Portfolio PLUS ETF Action Daily Swing Trade Market Movers ETF Shark Alerts TheStreet Ratings Top Gun Trader Top Stocks try { function DM_onSegsAvailable(segs, cust_id) { for(var i=0;i //* Global Functions *// function metadataRegisterNS(ns){ var nsParts = ns.split("."); var root = window; for(var i=0; i Dow Jones S&P 500 NASDAQ 10-Year Note 10,753.62 1,142.71 2,355.83 27.06 Oil * 79.44 UP 145.77 UP 17.12 UP 40.22 DOWN 0.40 10 Yr 2.71% SPDR Gold 124.87 +1.37% +1.52% +1.74% -1.46% Data delayed 20 minutes Latest Trade Alerts See all function renderFeedContent(data){ for(var i=0; i < 2; i++){ document.write('' + data[i].headline +''); document.write('' + data[i].productName+' ($) - ' + data[i].publishDate + ''); document.write('

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