5 things to watch for when Fed meets on Tuesday and Wednesday

With a recession this year now more likely than not, economists see the Federal Reserve as an ambulance racing down the road with the U.S. economy as its patient.

Should it stop at all the lights or be as aggressive as it can? Most economists say the latter. They expect the Fed is expected to pull out all the stops at their March 17-18 meeting.

"This is not the time to slow down now, so that there's room to accelerate later," said Avery Shenfeld, chief economist at CIBC Capital Markets.

Here's a look at what economists and investors will be watching for when the Fed concludes a two-day meeting this Wednesday.

Many economists expect the Fed to cut the fed funds rate by a full percentage point, to a range of zero to 0.25% at the March meeting.

This follows on the half-point cut already engineered earlier this month.

This would put the Fed at the "effective zero lower bound" for the benchmark rate. Because the Fed doesn't think negative rates would help, any more stimulus will have to come from its other tools and fiscal policy.

There is the possibility of a less-aggressive rate cut. Some economists say the Fed may only cut by a half-point to wait-and-see more of the economic data. So far, government data hasn't captured any of the economic slowdown expected from social distancing and uncertainty. How the Fed acts might depend on how financial markets fare over the next three days. The Dow Jones Industrial ended the week up over 9% on Friday after falling by about the same amount on Thursday.

Seth Carpenter, an economist at UBS, thinks the key part of the FOMC statement will be the forward guidance.

He said the Fed is likely to use language similar to "closely monitoring" and "use all tools as necessary" - phrases that are designed to signal a presumption of further easing.

But the Fed may step on this message by trying to project a positive tone, he said. Fed Chairman Jerome Powell is likely to be positive and stress the drag on economic growth from the coronavirus is temporary. The Fed's forecast for 2020 is expected to be only modestly lower.

"To some extent, the Fed's projections in the current environment should be viewed as hoped-for outcomes, in the context of what is plausible, and certainly not high-conviction forecasts," said Jim O'Sullivan, chief U.S. macro strategist at TD Securities.

The Fed's dot plot projections of future interest rate moves is expected to show some Fed officials projecting a quick exit from the zero lower bound.

Many economists said they won't pay much attention to the dot plot given the high level of uncertainty surrounding the outlook.

"A case could be made for not including one this time," said economists at TD Securities.

But Julia Coronado, a former Fed economist who runs an economic consulting firm in New York, said the dot plot would be "a great way to show committee unity and patience" with projections showing rates will stay at zero through 2021.

The Fed didn't wait for this week's meeting to take dramatic steps in lending to stressed financial markets.

The Fed announced Thursday it will lend $1.5 trillion to the short-term funding markets and was adding purchases of Treasury notes and bonds to its existing $60 billion per month purchase program of Treasury bills to expand its balance sheet. This gets the Fed right up to the line of more QE. This program could be extended beyond the current April end date.

Earlier on March 3 the Fed announced an emergency half percentage point cut in the fed funds rate also.

A big question for the market is whether the Fed goes further this week and embarks on the fourth round of asset purchases, known as quantitative easing, to help bring down longer-term interest rates.

But several economists, including the team at Morgan Stanley, think the Fed will jump over the line with an explicit open-ended purchase of longer-term Treasurys and mortgage-backed securities.

Other economists think the Fed might delay such a program until its next meeting at the end of April.

A large number of economists think the Fed will go back into its 2008 crisis tool kit and reinstate programs designed to get credit flowing in all parts of the financial system.

An alphabet soup of programs, last used after the financial crisis, could include:

* Dollar swap lines with foreign central banks. The intent is to allow foreigner institutions to get dollar funding from central banks in their regions. The Fed has standing lines with the major central banks but needs to expand them to other central banks.

* Term Auction facility to provides banks with funding with collateral requirements without going to the emergency discount window.

* A commercial paper funding facility that gets funds to nonbank financial institutions which do not have access to other Fed financing.