By
Daryl Montgomery
:
Second-quarter GDP was revised up from 1.5% to 1.7% this
morning, and the Fed's Beige Book this afternoon stated that modest
improvements in the economy were taking place. So how can Fed Chair
Bernanke justify a third round of quantitative easing? He
can't.
Market participants who are expecting a full-out statement
supporting QE3 this Friday at the economic confab being held at
Jackson Hole are likely to be sorely disappointed. Bernanke made
such a statement in 2010 before the second round of QE began at the
end of that year. The Fed leaked the information to the stock
market even before that. It got maximum mileage in terms of juicing
up stock prices as a result. A recovered economy, however, didn't
quite materialize. If a third round of QE is being taken seriously,
it indicates the first two didn't exactly benefit the economy as
much as was claimed.
Seeing how successful they were in manipulating stock prices in
2010, the members of the FOMC (Federal Open Market Committee) are
merely attempting to use the same playbook in 2012. Stories were
planted in the mainstream media in June about how the Fed was going
to do more QE. When that didn't materialize, there was an immediate
segue to "they didn't do it this time, but will at the next
meeting." Before the late July-early August meeting, a front page
story appeared in
The Wall Street Journal
that the Fed was determined to do something at the next meeting,
and the members of the FOMC were discussing more QE. The meeting
came and went and no policy change was announced. The "they didn't
do it this time, but will at the next meeting" theme immediately
reappeared.
Last week, the minutes from the July 31-August 1 meeting were
released, and they did contain a lot of
discussion
concerning more quantitative easing. The members of the FOMC knew
that this would become publicly available information and would
help move the markets up (at least for a while), even if they
weren't intending to do anything. Even if they were, their hands
are becoming increasingly tied.
The official economic numbers are mediocre, but QE isn't
justified unless they are really poor. A GDP of 1.7% is not low
enough to make the case for more quantitative easing. If it is,
then the Fed will be printing money most of the time in the future.
Retail numbers and the jobs report also supposedly showed some
improvement after the last Fed meeting. The Fed Beige book, a broad
survey of the U.S. economy, released this afternoon, essentially
said the economy was doing OK. The reasons for more QE are rapidly
being undermined.
There are other problems that will prevent any casual QE from
being done right now as well, and they emanate from the
presidential election. Republican candidate Romney has already
stated more than once that he intends to replace Ben Bernanke as
Fed Chair. Ben Bernanke implementing QE before the election would
be seen as a blatant attempt to help reelect President Obama and
save his job. It would become a major political issue and bring
scrutiny to the Fed's actions that it most certainly would like to
avoid (the Fed constantly claims that it is politically
independent).
There is one instance, however, where the Fed could justify QE
before the election -- if there is a breakdown in the eurozone. ECB
head Mario Draghi and EU leaders are even better at promising and
not following up with concrete action than Ben Bernanke. Another
round of major money printing on a global scale would be considered
necessary, as was the case during the Credit Crisis in 2008. Back
then, it took six months of bombarding the financial system with
liquidity before markets bottomed out. Investors shouldn't be in
any hurry to buy this time around either, because stocks are likely
to have a major drop once again if problems in Europe get out of
hand. If it works at all, QE can take time to have an impact --
even on the stock market.
This posting is editorial opinion. There is no intention to
endorse the purchase or sale of any security.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
See also
Fed Is Twisted Into A Knot
on seekingalpha.com