09/18/2011 07:00 EDT | Updated 11/18/2011 05:12 EST

All eyes on U.S. Fed this week as traders ponder whether more stimulus coming

TORONTO - All eyes will be on the U.S. Federal Reserve this week to see if it will reach into its policy shed to pull out one of the tools it has tucked away to stimulate the economy.

As markets head into the final two weeks of what is historically the worst trading month of the year, consumers, businesses and investors around the world are trying to glean any signs the global economy could slip back into recession.

The Federal Reserve Open Market Committee is set to meet Tuesday and Wednesday — but it's highly unlikely the Fed will touch its key lending rate, given that it pledged not to raise rates until at least 2013.

Fed chairman Ben Bernanke has given no hints of other measures the body might be willing to take to combat prospects of another recession, but has said only that it will consider a "range of options" at the meeting this week.

There have been hopes and rumours of a third round of bond purchases, known as quantitative easing, but it's doubtful that would be introduced just yet as another round carries inflation and other risks.

"You'd rather get by without it and hopefully they will be able to get by without it — things seem to have calmed down a little bit," said ScotiaMcLeod equity trading director Fred Ketchen.

"I don't think it's on a fast road to recovery any time soon, but it doesn't look like over the past couple of weeks that things have gotten any worse."

Data released last week showed the U.S. inflation rate in August was a firm two per cent.

Quantitative easing appears to be off the table, and there are other reasons investors shouldn't expect much else, said CIBC World Markets economist Peter Buchanan.

"Of course, there’s a clear element of desperation as well. The Fed finds itself having to reach ever deeper into its increasingly sparse tool kit because of the constraints on the government’s other key lever, fiscal policy," he added, speaking of the White House's latest plan to stimulate growth.

"President Obama’s American Jobs Plan would help to ward off a potential recession-inducing tightening of fiscal policy next year, as earlier stimulus measures lapse, but prospects for enactment are anything but certain."

There will be economic data coming in from Canada this week, including leading indicators, wholesale trade, inflation and retail trade data, but events in Europe and the U.S. outweigh the importance of the state of Canada's economy — which is faring much better than many other industrialized countries.

Despite Canada's relatively strong economy, the Toronto Stock Exchange has tanked much more this year than its Wall Street counterparts. The TSX is down eight per cent year over year, while the Dow Jones and Nasdaq are each down less than two per cent.

The S&P/TSX composite index closed Friday at 12,263.71, down 161.13 points for the day and 124.23 points for the week.

South of the border, however, stock markets finished Friday with their second-best week in a year as Europe's debt problems appear closer to a resolution.

The Canadian index is much more affected by commodity prices — which have been dropping off in recent months — than the U.S. markets.

"When you compare Canada's economy to the economies of a number of other countries around the world we're in better shape — you wouldn't know it by the index," Ketchen said.

With little more than three months left in 2011, he doubts the TSX will be able to rally to a positive close this year.

But Allison Mendes, a money manager at Manulife Asset Management in Toronto, expects to see a bounce heading into the end of the year given that stock prices have been discounted far below their values.

"There's a disconnect with what we're seeing because if you look, fundamentals are actually pretty decent," Mendes said.

"Profitability is high both in Canada and the U.S. and earnings are coming in positive across all sectors, but the market doesn't care."

Corporate balance sheets are strong, meaning there's a lot of opportunity to create value for shareholders — from boosting dividends, to a share buy back to acquisitions, she added.

"The market's not looking at fundamentals, it's looking at headlines and at some point fundamentals are going to matter again and investors are going to pay for the fact that these corporations are in far better shape and that their outlook is not as murky as what's being priced into the market."