the prospects for a third round of quantitative easing, particularly one that would involve reverse repos that could boost supply of short-term money market instruments.
At the end of a two-day meeting, the Federal Open Market Committee will put out a policy statement at 12:30 EDT (1630 GMT) and its forecasts at 1400 EDT/l800 GMT. Fed Chairman Ben Bernanke's news conference starts at 1415 EDT/1815 GMT.
"What people are going to be looking for is whether or not there will be a QE3 and if so, whether it will be sterilized," said David Sylvester, head of money funds at Wells Capital Management in Minneapolis, referring to a third round of
unconventional monetary easing.
"The money markets hope a sterilized QE3 could bring more supply into the money markets in the form of reverse repos with the Fed, though I don't think that will happen, at least not yet," Sylvester said.
Since late 2008, the Fed has kept interest rates near zero and bought $2.3 trillion in securities to spur growth and support the recovery.
So-called sterilized quantitative easing is a strategy that could placate the Fed's inflation hawks who believe further expansion of the Fed's balance sheet might be inflationary.
It would let the Fed "sterilize" any new purchases they made by conducting open market operations such as reverse repurchase operations, to drain bank reserves even as it injects temporary liquidity.
"Supply (in the money markets) is down considerably from the peak in 2008 so sterilized QE3 that would bring more supply into the money markets would be very helpful," Sylvester said.
Jeffrey Cleveland, senior economist of Los Angeles-based Payden & Rygel, which manages a lot of short-duration accounts, agreed there was a shortage of short-term assets.
"Trillions of dollars of corporate cash, institutional cash, or money funds are all seeking out short-term instruments and other than Treasuries, there aren't many options to fill the safe-haven bucket," he said. "We talk a lot about how the
overwhelming demand for safe assets is keeping rates low."
Rob Robis, head of fixed-income macro strategies for ING Investment Management, a firm with $160 billion in assets under management, said to figure out what the Fed will do, "you should still watch what the dovish side of the Federal Open Market Committee is saying.
"It's pretty clear the doves still have the upper hand and the latest employment report showing slower payrolls growth highlighted that," he said.
Prominent doves include Federal Reserve Bank of New York President William Dudley, Fed Vice Chair Janet Yellen, and Fed Chairman Ben Bernanke.
"The U.S. economic recovery is still very fragile and because of that there is no reason to believe the playbook the FOMC has been playing with for the last two or three years will change," Robis said.
The Fed's belief that exceptionally low levels for the federal funds rate are likely to be needed at least through late 2014 "is almost as important as the low-rate policy itself because rates farther out on the yield curve will stay lower if
people believe the Fed will keep rates lower for longer."
In the euro zone, key euro-zone bank-to-bank lending rates reached new 22-month lows on Tuesday, thanks to the record amount of cash the European Central Bank has pumped into financial markets since late last year.
The ECB, which left official euro-zone interest rates at 1.0 percent earlier this month, has put more than 1 trillion euros of low-cost, three-year funds into the banking system since the end of December.
The surplus has driven down the cost of borrowing on the interbank market, taking rates to half what they were last August.
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