As Fed meets, investors want to know if stimulus is coming

NEW YORK -- Like a drug addict, a dependent Wall Street hopes the Federal Reserve will inject the economy and markets with a fresh dose of monetary stimulus to stave off withdrawal caused by the end of the Fed's current stimulus program, a slowing economy and debt-related turmoil in Europe.

The Fed kicks off a two-day meeting today on interest rate policy at a time when fears of an economic relapse are rising and investors are looking for assurances from the Fed that it is ready to act to keep the recovery on track. The meeting follows Greece's closely watched election on Sunday, which ended in a market-friendly way with a win by the party that backs Greece remaining in the euro and living up to its bailout agreements.

Since the financial crisis in late 2008, the Fed has announced three rounds of stimulus. In each case, the U.S. stock market reacted favorably, with gains of 80%, 33% and 29%, respectively. The goal of the Fed's unconventional programs was to boost economic growth by driving down borrowing costs on mortgages, while inflating prices on risky assets like stocks, in an effort to make Americans feel better off financially and make them more willing to spend.

And even though the economy remains sluggish and the stock gains have gotten smaller with each successive round of stimulus, investors have gotten conditioned to thinking stocks can only go up with Fed assistance.

"The market has become a junkie for Fed stimulus," says Edward Yardeni, chief investment strategist at Yardeni Research. "Investors will go through withdrawal if they don't get it."

In addition to pledging to keep short-term rates at roughly 0% until mid-2014, the Fed has injected hundreds of billions in cash into the financial system by buying assets, such as mortgage-backed bonds and U.S. Treasuries, a strategy known as a quantitative easing, or QE. A more recent strategy, dubbed "Operation Twist," which ends this month, involves selling short-term Treasury bonds and buying longer-term Treasuries to keep long-term yields low.

Wall Street hopes the Fed will announce more stimulus Wednesday. An extension of Operation Twist is a possibility. A new round of quantitative easing — QE3 — would be bullish, although unlikely. Says Lance Roberts, chief economist at StreetTalk Advisors. "Without the Fed doing something, the economy will slip into recession."