Federal Reserve Chairman Ben Bernanke’s upcoming speech in Jackson Hole, Wyo., at month’s end just became the hottest ticket in monetary policy town.
Wednesday’s release of the minutes from the last Fed meeting showed a central bank much, much closer to enacting more extraordinary stimulus measures. But that hardly means the Fed is once again going to pull the trigger.
Or that it will be good for stocks, even if it does.
The Federal Open Market Committee, which sets policy and rates, was rolling up its sleeves for a third round of quantitative easing (QE3) when it met three weeks ago, the minutes make clear. But gumming up the the probability of more QE is that the economic picture has improved somewhat since the last time Ben & Co. met.
After all, these are minutes from a meeting that took place before the much-improved July jobs report and other signs of a strengthening economy, like retail sales.
Furthermore, the Fed will get the August jobs report before its next policy meeting Sept. 12-13.
A lot has transpired since the Fed last met, and we have some key data yet to come in. That makes Bernanke’s Jackson Hole speech all the more important when it comes to reading the Fed’s tea leaves.
But more important: Investors shouldn’t lose sight of the fact that more QE is not the cure-all for a weak recovery and high unemployment.
If ultra-low interest rates were the answer, the U.S. economy would be sprinting by now. The yield on the benchmark 10-year Treasury note has repeatedly hit record lows, and, even after a recent rally, still is well under a once-unthinkable 2%. Mortgage rates are likewise notching once-in-a-lifetime lows.
And as for forcing money out of the bond market — or out from under the mattress — and back into risk assets, well … stocks are near four-year highs, yet volume is at a five-year low.
More worrisome is that the market is setting itself up to be sorely disappointed if the Fed and the European Central Bank fail to act — and it’ll probably sell off even if they do.
The S&P 500 is up about 6% since late July, or shortly after ECB President Mario Draghi said he would do “whatever it takes” to save the euro. At the same time, safe-haven assets have sold off. The yield on the benchmark 10-year Treasury note rallied above 1.8% from all-time lows below 1.4% since Draghi’s mid-summer remarks.
Unlike the last two years, the stock and bond markets are leading the policy actions this time around. If you’re betting on a Fed-induced rally, you could just be setting yourself up for a sell-off once the policy news actually hits.
Finally, perhaps the most serious risk to the market and economy is the fiscal cliff that the U.S. is hurtling toward on Jan. 1, 2013.
The nonpartisan Congressional Budget Office said Wednesday that the combination of automatic tax hikes and spending cuts would throw the economy into recession in 2013. There’s nothing the Fed can do about that. The fiscal cliff is outside its purview and entirely in the hands of the legislative and executive branches of the federal government.
So even if we do get QE3 in September — diminishing returns and all — the truly scary problem won’t even be on the agenda until after the November elections.
It’s shaping up to be an interesting fall.