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By Jason Stipp | 08-06-2010 02:45 PM

Don't Count on a Fed Fix

Although the Fed's remaining toolbox is constrained, investors can stack the deck in their favor with high-quality stock picks, says Morningstar's Bill Bergman.

Jason Stipp: I'm Jason Stipp for Morningstar. The Federal Reserve is slated to meet next week and the pressure is on in light of a disappointing jobs report. A lot of folks are expecting the Fed to have some sort of additional quantitative easing program.

Here with me to talk about the implications and the tools that are left for the Fed is Morningstar's Bill Bergman. He is an equity analyst, and he is also a former economist at the Federal Reserve and a financial markets policy analyst.

Thanks for joining me, Bill.

Bill Bergman: Hi, Jason. Good to be here.

Stipp: The first question for you: a lot of folks, given that we've seen some economic indicators really weaken over the last few weeks, are expecting that the Fed might have to take some additional actions. The Fed for a long time had been saying that they're going to be keeping rates about the same that they were not going to be looking to tighten anytime soon, but now folks are talking about the Fed having to take additional actions to try to help ease what could be a slowing recovery.

My first question for you, rates are already close to zero, the short-term rates, what tools does the Fed have left?

Bergman: Well, they still have some tools that they have left that they've been using already, even though we have zero short-term interest rates now, but the Federal Reserve can also buy assets out there, and as you'd mentioned, quantitative easing, the Federal Reserve can go out and buy assets. That helps to create money in the economy.

The Federal Reserve, when it buys assets from the banking system or from the financial markets, what does it do? It takes those assets in; and what goes out, the Federal Reserve reserves, and money growth can happen as a consequence of that. So it's not necessarily clear that zero interest rates are things that stop monetary policy from working. But having said that, there are some constraints on the ability of the Fed to – there are issues going further down that route.

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