11/8/2011 8:55 PM ET
With Europe a mess and the US economy at risk, the Federal Reserve seems poised to announce a third round of stimulus. It could mean another rally.
Jim Jubak
Virtually unnoticed amid the Sturm und Drang last week from Europe, on Nov. 2, the U.S. Federal Reserve inched closer to a new round of quantitative easing.
The likely shape of such an economic stimulus effort would reflect the Fed's fears that U.S. economic growth is still much too weak and fragile, that the big problem is a lack of any real recovery in the housing market, and that its "Operation Twist" has failed to significantly lower mortgage rates.
What would move the Fed to actually pull the trigger on a program that would result in a political firestorm? (Remember, Republican presidential contender Rick Perry has already said he'd regard Fed Chairman Ben Bernanke as a traitor if the Fed tried to increase U.S. economic growth ahead of the 2012 presidential election.)
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Two things, I think:
Signs that the U.S. Congress will not only let the 2010 lame duck stimulus expire in December but also either do something that would endanger the nation's AA credit rating or move to reduce near-term government spending, applying the brakes to an economy that's barely moving ahead as it is.Signs that the euro debt crisis -- and the "solutions" to it -- are likely to let loose another round of global deleveraging like we had after the Lehman Brothers bankruptcy in 2008.The Fed is likely to get confirmation of its worst fears on both of those fronts over the next two to six weeks.
A third round of quantitative easing would by no means be as powerful a force in the markets as QE1 or QE2, but it would definitely push the U.S. dollar lower, increase fears of inflation, prop up commodity prices and revive the gold market. What it would do for stock prices is less clear, although a replay of the rally that followed the announcement of QE2 is a strong possibility.
The Fed is getting worriedLast week's meeting of the Fed's Open Market Committee ended the way that the meetings of this interest-rate-setting body always do -- with a statement to the media. Last week's statement was cryptic (as these statements always are), and you had to study the wording carefully to see that the Fed was even contemplating any change in policy.
But there it was.
In September, the committee said that it had "discussed the range of policy tools available to promote a stronger economic recovery in the context of price stability."
Last week, the committee said that it was "prepared to employ its tools to promote a stronger economic recovery in the context of price stability."
What's quantitative easing?
Significantly, there was only one negative vote at this meeting, and it came from Chicago Fed chief Charles Evans, who wanted the Fed to do more to bolster the economy. After the Sept. 21 meeting, the committee registered three negative votes on a much weaker statement on the need to act to increase economic growth. And those came from three other Fed presidents, Richard Fisher, Charles Plosser and Narayana Kocherlakota, who have been strong advocates of the Fed doing less. In other words, in the course of a month, the votes on the Open Market Committee have swung decisively in favor of more, rather than less, intervention.
Why? Let's start again with the committee's statement.
"Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter . . . . Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated . . . . The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets."
So this is what the Fed sees for the economy -- slow growth, with unemployment staying elevated for far longer than in a typical recovery from recession. And with the risks all to the downside.
Continued: Twisting in the windSingle page12Next >RELATED ARTICLESJubak on video: Is Eastern Europe another domino?Igor Greenwald: Groupon's raw deal for Main StreetThe week ahead: Can the bulls stay in charge?Focus on Bank of China, not the Fed - 1 - investing strategy - MSN ...Bond king Gross dumps Treasurys - 1 - QE2 & US debt - MSN MoneyHow to really fix the federal budget - 2 - debt debate - MSN MoneyVIDEO ON MSN MONEY/*$.dap("&PG=INVPEB&AP=1402",600,250,"ConAd-1");Feedback /**/ var scp_UserRating=-1; down_arrow_hover= new Image(); down_arrow_hover.src = 'http://blu.stc.s-msn.com/br/scp/css/15/decoration/toolbar/rating/down_hover.gif'; down_arrow_normal= new Image(); down_arrow_normal.src = 'http://blu.stc.s-msn.com/br/scp/css/15/decoration/toolbar/rating/down_normal.gif'; up_arrow_hover= new Image(); up_arrow_hover.src = 'http://blu.stc.s-msn.com/br/scp/css/15/decoration/toolbar/rating/up_hover.gif'; up_arrow_normal= new Image(); up_arrow_normal.src = 'http://blu.stc.s-msn.com/br/scp/css/15/decoration/toolbar/rating/up_normal.gif'; var scp_thankyoutext = 'Thank you!'; var scp_thankyoualttext = 'You have voted on this'; var scp_votestext = '{0} votes'; var scp_votescount = 39; var scp_errmsg = 'Errors occured while saving your rating. 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2 2ReportSpamEricTheRon1325 minutes ago
Someone (afraid of a name near your own?):
It's too bad these discussion boards are dominated by BOMBs (Boys Of Mom's Basement). I wish you would all read more than stuff you think you agree with, and read critically, because if you know nothing you only support your ignorance (and paranoia in many cases).
Here's a good start: Read "Endgame" by John Mauldin. Very intelligent, and actually addresses possible outcomes instead of just playing the "blame game" so dear to your hearts. And does so in language a politician could understand, so for anyone else it's a breeze.
2 1ReportSpamIce Cold Sangria35 minutes ago
Kind of takes you back to John Dean requesting a private audience with President Nixon and advising him that there is a "cancer in the Presidency." Only now it has spread elsewhere.
0 1ReportSpamHeparin38 minutes agoI think good Mister Jubak is preparing us for the "Keynesian Endpoint" a fact that seems to escape the rest of the yahoos 0 1ReportSpamSomeone41 minutes agoEricTheRon13,Your wrong on your comment that the Fed has nothing to do with the government running up more debt. The money the Fed prints is fictitious and created out of thin air with nothing to back it up. The value is based on what It makes money on the interest it incurs of the printed money it lends to the banks. The problem with the U.S. debt is the Fed. I don't have the time or space to go into detail, but when you get a chance go to www.zeitgeist.com and watch the two documentaries on the Fed which by the way is not a Federal agency and is as much a Federal government agency as Federal Express is, it's privately owned. It's time to wake up America!!!! 2 2ReportSpamEricTheRon131 hour ago
Stromprophet:
The Fed has NOTHING to do with the government running up more debt. This is our spineless elected representatives in Congress (theme music: "We're just the girls who can't say No!").
However, if Congress succeeds in a Fed takeover, as Barney Frank is trying to do, they will deliberately monetize the Federal deficit to support Congress running bigger deficits, and this leads directly to hyperinflation. The lact of central bank independence is the harbinger in all cases of hyperinflation in the past. (And it's starting in England right now--take a look.)
8 1ReportSpamJeremy123411 hour agoWhen will they get it, QE hasn't worked in this scenario. The money hasn't gotten out to drive demand, instead it sits in bank coffers and only investment firms have used it. And those investment firms use the money for margins in stocks and especially commodities. The commodities part just drives up inflation. And as for businesses that would seek to produce more due the higher "profits" induced by inflated commodity prices, they outsource the production from outside the country therefore not stimulating any domestic demand by increasing jobs.
QE1 looked like it might have been working, but QE2 dispelled any myth that it was.
Bernanke was right, this is a legislation problem. It can not really be fixed at the fed reserve level. It's about stimulating manufacturing growth in this country and level trade between others so that we are not exploiting foreign workers in exchange for lower paying and decreasing availability of our jobs. Until they figure that out, its going to continue to get worse.
8 1ReportSpamEricTheRon131 hour agoYes, it's sad they're going to pump inflation a little bit with the mistaken idea that "inflation = prosperity". But since monetary velocity is declining, the cash is mostly going to sit in banks (Who wants more debt? You?). The real problem here is the overall quality of the Fed's balance sheet, because that's what backs up the currency and faith in the currency.
However, it depends on the QUALITY of mortgage bonds the Fed buys.If they're buying grade A mortgage securities like GNMAs, that's better than buying Treasuries. (i.e. there is collaterial behind the loan, it pays more than inflation, and the Treasury still backs it.) But it's dangerous if they're buying lower-quality stuff--that's one of the steps toward hyperinflation. (but the bigger one is if Barney Frank succeeds in appointing his own commissars to the Fed board).
3 1ReportSpamwiseGuy11 hour agoMark my words: whatever Fed Reserve does, it will not stimulate the real economy, and it will not create jobs. It has been proved 2 times (QE 1 and QE2) or may be the third times (Operation Twist). So, why do Jubak thinks that Fed fourth try will make a different?
It is sad that Jubak is regurgiating democrats' talking point that republicans do not want the economy to go well. To be really objective, he should note that republicans' position is that Fed reserve is unable to stimulate the economy nor create jobs. Endless QE is just blowing bubbles.
Federal reserve is just an organization by the big banks, of the big banks and for the big banks. If you are not associated with the big banks or political connected, don't count on any cent of benefits to you.
As for Jubak, my advice to him is to stick to investment topics ONLY.
11 2ReportSpamRollin_Trick2 hours agoQE3 THIS! Mr. Bernanke...You can take "Operation Twist" and shove it....STOP messing with this economy....!!! 11 3ReportSpamMichael Coats (trust2112) 3 hours agoPeople forget that Alexander Hamilton was a banker and twice tried to get a Central Banking System going (like the Fed) and look where that got him? That is the problem with "The Federal Reserve", they just don't know when to keep their hands off anything and let the markets correct themselves. With 40 million plus people out of work and another 50 or 60 million underemployed, it is only a matter of time before profits start disappearing. If consumers don't work, we don't buy things. And last time I checked, America still drove the worlds markets. I don't think "We The People" or our European neighbors want to emulate China. Highest pollution, no regulations on drinking water, no regulations on food, middle class making 2 dollars a day... That is what businesses want, Americans competing on a world market for world wages. Just let 1 dollar be worth 1 dollar and not trying to be worth more or less. That is market manipulation and last time I checked, was illegal. 20 2ReportSpamJBC1651004 hours agoThey are only doing this because Congress doesn't have the political will to do what might actually work: fiscal expansion. In the liquidity trap (which we and Japan are currently in), expansion of FR balance sheets won't do much to actually help the economy, because money is being held simply as a store of value, in that those holding it will still hold it in the face of devaluation. If there is no way to encourage consumer/government spending, the economy won't recover. It would probably affect commodities, in which headline inflation rises slightly, but even after the last round of stimulus the headline inflation (change in CPI from a year prior) was lower than or equal to that under the Bush administration.The only thing that can get the economy moving again is a large direct hire of workers by the government. No loans to states, no tax cuts (these made up the lion's share of the stimulus last time). Don't even contract the work out to private contractors! They are probably the worst at padding the bottom line to eek more out of public spending. Essentially, what I'm proposing is a modern day WPA.We have real potential output wasting away in the 9% official unemployment (higher for those giving up on seeking work and underemployment). Only through this direct employment will our output be in line with potential and "prime the pump" need to get out of the slump. To see how badly we are in for it with employment, this is a PNG of the civilian employment/population ratio, probably the broadest measure for employment health. You can see that it hasn't improved since the recession.http://research.stlouisfed.org/fredgraph.png?g=3ex 7 14ReportSpamStromprophet4 hours agoWell....technically it's a "quasi government" institution with a national economic mandate.
The FOMC is made up of 7 governers and 5 Bank Presidents. The 7 governers are appointed by the POTUS and confirmed by the Senate.
What's striking is, if they were so inclined to actually serve the governments best interest (by this I mean, a democratic government, i.e. serve the interest of what's best for the nation and the people in it) They wouldn't take advantage like they do (allowing the government to acrue as much debt as they please, because it's really good business for private banks who hold the debt). So it's kind of obvious that:
A) The Fed Governers are really advocates for the private banking sector
B) The POTUS who appoint them are letting those with private banking leanings into the job
C) The Senate is confirming the same people
13 2ReportSpamxataran4 hours agoRepublican presidential contender Rick Perry has already said he'd regard Fed Chairman Ben Bernanke as a traitor if the Fed tried to increase U.S. economic growth ahead of the 2012 presidential election.Nice interpretation. A spot on read of what Perry meant, even if he didn't phrase it just that way. 11 3ReportSpambrutis bear4 hours agoPeople the FEDERAL RESERVE is not a part of the Government. Central bank The Administration, Congress nor the Senate can make Federal Rserve do squat. The F.R. dictates to the Government of the USof A it will take this dept and pass the future interest unto future generations. 14 2ReportSpambrutis bear4 hours agoReserch Fractional Reserve Central Banking. Knowledge is power! 16 2ReportSpambrutis bear5 hours agoBAILOUTS... is Fascism!
It didn't work the first time so lets do all over again but bigger. Insanity is doing the same thing over and over again and again expecting different results! Find the Trillions missing from the first bailout before you print more money! Stupid is Stupid does
42 3ReportSpamSomeone (clevus) 5 hours agoOne thing is for certain no one on wall street or in the beltway intends to do anything to help America or it's citizens, printing more money for the speculators to piss off is only going to drive the cost of everything up, putting millions just making ends meet in the poor house, the poor house is already over capacity in this and many other countries. Destroying peoples lives just to give a handful of people already setting on trillions another trillion is absurd, it should be absolutely clear those people do not intend to do anything with their trillions to benefit anyone but themselves so why keep lining their pockets at everyone else's expense? The theory of "trickle down" economics assumes the people at the top are ethical patriotic soles who won't dam all the wealth up at the top, it can not work when you have a bunch of soulless robber baron types calling the shots and that is exactly what we have today, the dam that has been erected between the "top" and everyone else needs to come down, and it will, the only question that remains is by what means. 46 2ReportSpamFair and Balanced 785 hours agoThose who can line their own pockets will always do so. Get over it. 16 4ReportSpamSunny outlook5 hours agoBernanke only wants to make sure Obama gets re-elected so he can keep his job.....the Repub candidates are making it clear Bernanke has to go. WE DO NOT NEED QE3. People are having a hard enough time buying gas and food as it is and another QE will just make that entire situation worse due to rise in commodity prices. Nothing good is going to be done for the American people until after the election. Not one politician in this country cares if they leave us regular folks hanging in the wind. 35 14ReportSpam123 Add a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. 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The Fed is likely to get confirmation of its worst fears on both of those fronts over the next two to six weeks.
A third round of quantitative easing would by no means be as powerful a force in the markets as QE1 or QE2, but it would definitely push the U.S. dollar lower, increase fears of inflation, prop up commodity prices and revive the gold market. What it would do for stock prices is less clear, although a replay of the rally that followed the announcement of QE2 is a strong possibility.
Last week's meeting of the Fed's Open Market Committee ended the way that the meetings of this interest-rate-setting body always do -- with a statement to the media. Last week's statement was cryptic (as these statements always are), and you had to study the wording carefully to see that the Fed was even contemplating any change in policy.
But there it was.
In September, the committee said that it had "discussed the range of policy tools available to promote a stronger economic recovery in the context of price stability."
Last week, the committee said that it was "prepared to employ its tools to promote a stronger economic recovery in the context of price stability."
What's quantitative easing?
Significantly, there was only one negative vote at this meeting, and it came from Chicago Fed chief Charles Evans, who wanted the Fed to do more to bolster the economy. After the Sept. 21 meeting, the committee registered three negative votes on a much weaker statement on the need to act to increase economic growth. And those came from three other Fed presidents, Richard Fisher, Charles Plosser and Narayana Kocherlakota, who have been strong advocates of the Fed doing less. In other words, in the course of a month, the votes on the Open Market Committee have swung decisively in favor of more, rather than less, intervention.
Why? Let's start again with the committee's statement.
"Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter . . . . Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated . . . . The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets."
So this is what the Fed sees for the economy -- slow growth, with unemployment staying elevated for far longer than in a typical recovery from recession. And with the risks all to the downside.
The Rothschilds... woops.. Feds purpose is to reduce the middle class to dust.
Someone (afraid of a name near your own?):
It's too bad these discussion boards are dominated by BOMBs (Boys Of Mom's Basement). I wish you would all read more than stuff you think you agree with, and read critically, because if you know nothing you only support your ignorance (and paranoia in many cases).
Here's a good start: Read "Endgame" by John Mauldin. Very intelligent, and actually addresses possible outcomes instead of just playing the "blame game" so dear to your hearts. And does so in language a politician could understand, so for anyone else it's a breeze.
Kind of takes you back to John Dean requesting a private audience with President Nixon and advising him that there is a "cancer in the Presidency." Only now it has spread elsewhere.
Stromprophet:
The Fed has NOTHING to do with the government running up more debt. This is our spineless elected representatives in Congress (theme music: "We're just the girls who can't say No!").
However, if Congress succeeds in a Fed takeover, as Barney Frank is trying to do, they will deliberately monetize the Federal deficit to support Congress running bigger deficits, and this leads directly to hyperinflation. The lact of central bank independence is the harbinger in all cases of hyperinflation in the past. (And it's starting in England right now--take a look.)
When will they get it, QE hasn't worked in this scenario. The money hasn't gotten out to drive demand, instead it sits in bank coffers and only investment firms have used it. And those investment firms use the money for margins in stocks and especially commodities. The commodities part just drives up inflation. And as for businesses that would seek to produce more due the higher "profits" induced by inflated commodity prices, they outsource the production from outside the country therefore not stimulating any domestic demand by increasing jobs.
QE1 looked like it might have been working, but QE2 dispelled any myth that it was.
Bernanke was right, this is a legislation problem. It can not really be fixed at the fed reserve level. It's about stimulating manufacturing growth in this country and level trade between others so that we are not exploiting foreign workers in exchange for lower paying and decreasing availability of our jobs. Until they figure that out, its going to continue to get worse.
Yes, it's sad they're going to pump inflation a little bit with the mistaken idea that "inflation = prosperity". But since monetary velocity is declining, the cash is mostly going to sit in banks (Who wants more debt? You?). The real problem here is the overall quality of the Fed's balance sheet, because that's what backs up the currency and faith in the currency.
However, it depends on the QUALITY of mortgage bonds the Fed buys.If they're buying grade A mortgage securities like GNMAs, that's better than buying Treasuries. (i.e. there is collaterial behind the loan, it pays more than inflation, and the Treasury still backs it.) But it's dangerous if they're buying lower-quality stuff--that's one of the steps toward hyperinflation. (but the bigger one is if Barney Frank succeeds in appointing his own commissars to the Fed board).
Mark my words: whatever Fed Reserve does, it will not stimulate the real economy, and it will not create jobs. It has been proved 2 times (QE 1 and QE2) or may be the third times (Operation Twist). So, why do Jubak thinks that Fed fourth try will make a different?
It is sad that Jubak is regurgiating democrats' talking point that republicans do not want the economy to go well. To be really objective, he should note that republicans' position is that Fed reserve is unable to stimulate the economy nor create jobs. Endless QE is just blowing bubbles.
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