Forget the Fed — It Won’t Matter Until 2013

Don't expect anything with punch to come out of the FOMC meeting

     

Federal Reserve Chairman Ben Bernanke will be center stage at the Federal Open Market Committee meeting Wednesday. Will investors be greeted by some big news from Bernanke? Is there a so-called “Operation Twist” in the works?

Highly unlikely. The sad reality is the Fed just doesn’t have a lot of punch left. On top of that, Bernanke and the rest of the Fed are not very interested in making a lot of noise right now as critics sharpen their knives after QE2.

It all adds up to a whole lot of nothing from the Federal Reserve – today, tomorrow, and across every day for the next two years.

Rates Going Nowhere

The Fed funds rate has been effectively zero since December 2008. And for those of you who were listening to Ben Bernanke in early August, it will keep interest rates at record lows until mid-2013. There’s no way that is changing Wednesday.

The federal funds rate is the central bank’s key tool to spur economic growth. And unfortunately, growth isn’t very impressive at all. The IMF just lowered its growth estimate for the U.S. to 1.5% GDP expansion this year and cut the entire globe’s growth prospects from 4.3% expansion to 4%.

The central bank is waiting for a sign that the economy is out of danger before raising rates — and they’ll be waiting for a long time. The debt crisis in Europe weighs on the market, unemployment remains high, housing remains brutalized and consumers are starting to get jittery again.

Until meaningful progress is made on most of these fronts, it’s going to be near-zero rates at the Federal Reserve.

QE3 is Dead In the Water

Some folks think Bernanke will push for another round of quantitative easing. As recently as August — as the bottom was dropping out of the market to the tune of 15% in about two weeks — comments by several Fed officials hinted at another round of “quantitative easing” if the economy continues to deteriorate.

But QE3 has yet to materialize beyond rumors, and the political environment in Washington is not conducive to those efforts. Aside from philosophical arguments about the role of the Fed an long-term inflationary fears, the bottom line is that QE2 was a bust.

After some economists warned of inflation risks (which proved to be true, vis-à-vis the resulting spike in commodity prices) and Republican members of Congress criticized the Fed’s plan as “printing money out of thin air,” any further easing would be troublesome to pull off. Everyone will be saying, “QE2 helped the stock market but did little to lift the economy. Why would QE3 be any different?”

To embark on another iffy voyage of quantitative easing in a hostile political environment — before an election no less — seems highly unlikely.

 
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