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The Fed's 2012 swan song

(MoneyWatch) The Federal Reserve's Open Market Committee will finish its 2012 work this week with the final policy meeting of the year; economic forecasts; and a Bernanke press conference chaser. The central bankers are likely to urge the president and lawmakers to avert the so-called "fiscal cliff," a term now credited to Chairman Ben Bernanke himself.

Also on the agenda will be the nation's moribund economic growth and ways the Fed may be able to help boost it through monetary policy. Analysts now believe that economic growth for the fourth quarter will sink to about 1 percent, down from the 2.7 percent annualized rate seen in the third quarter. If that were the case, total growth for 2012 would be less than 2 percent, matching 2011's pokey rate.

At that rate and given the continued weakness in the nation's labor market (see "November jobs report: Sandy impact muted"), the question facing the Fed is whether to extend "Operation Twist" beyond its year-end expiration. Operation Twist, which was implemented in September 2011, was a policy where each month, the Fed sold $45 billion worth of short-dated government bonds and bought an equal amount of government bonds with longer maturities. The goal was to lower long-term rates to encourage more borrowing and spending, which would in turn (hopefully) create more economic growth.

Some Fed officials have hinted that instead of renewing Operation Twist, they might prefer to add $45 billion per month to "QE3", the strategy announced in September, where the fed buys $40 billion a month of mortgage-backed securities on an open-ended basis. Whether it's an extension of Twist or a beefed up QE3, the net effect is the same: Easy money as far as the eye can see.

The other big decision the Fed will ponder is whether to replace language that states rates will remain low until mid 2015 with hard targets based on the rate of inflation and the nation's unemployment rate. For example, the central bank might say that rates will remain low until unemployment falls below 6.5 percent and inflation rises above 2.25 percent. Fed Vice Chairman Janet Yellen recently called for specific thresholds to guide policy, though she noted that while the thresholds would guide policy, they would not trigger an automatic change to policy. Stay tuned for Bernanke's presser for more on the communications strategy.

Until then, the fiscal cliff negotiations should enter high gear and the readings on inflation and retail sales will round out the economic calendar for the week.

-- DJIA: 13,155, up 1% on week, up 7.7% on year

-- S&P 500: 1,418 up 0.1% on week, up 12.8% on year (up 4.3% over past 3 weeks)

-- NASDAQ: 2,978 down 1.1% on week, up 14.3% on year

-- January Crude Oil: $85.93, down 3.3% on week

-- February Gold: $1,705.50, down 0.4% on week

-- AAA Nat'l average price for gallon of regular Gas: $3.36


Mon 12/10:

Tues 12/11:

FOMC Meeting begins

7:30 NFIB November Small Business Confidence

8:30 International Trade

10:00 Wholesale Inventories

10:00 October Job Openings & Labor Turnover (JOLT)

Weds 12/12:

12:30 FOMC Meeting Announcement

2:00 Fed Economic Forecasts

2:15 Fed Chairman Bernanke Press conference

Thurs 12/13:

8:30 Weekly Claims

8:30 Retail Sales

8:30 Producer Price Index

10:00 Business Inventories

Fri 12/14:

8:30 Consumer Price Index

9:15 Industrial Production/Capacity Utilization

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