Handicapping the Fed in general and the odds of QE3 was the
major parlor game in the market for awhile, providing a framework
through which all incoming economic data was evaluated. What will
everybody do now that the Fed seems to have used up its last
bullets in one go?
Stocks love liquidity, and Thursday's open-ended liquidity
enhanced measure pushed the markets sharply. This morning's
positive Retail Sales and benign CPI reports will likely add to the
lingering positivity from Thursday's Fed inspired gains. We will
likely see above-average trading action in the shares of
), with the health insurer replacing the food and snacks company in
the Dow Jones index.
A few things stand out from the Fed action. First, the Fed is
throwing everything at its disposal to increase economic growth and
job creation. They not only came out with a new open-ended
housing-centric bond purchase program, but extended the zero-rate
guidance for another six months and retained Operation Twist. They
were at the end of the monetary rope to begin with, but they've
literally used up everything now.
Second, the Fed is now prioritizing the full employment part of
its dual mandate over the price stability piece. This morning's
benign-looking August CPI reading provides an explanation of why
the Fed would do that - inflation is just not much of an issue at
this stage. But the Fed is going a step ahead and guiding towards
being very accommodative even after the jobs picture starts
Third, the rising prices of stocks and other asset classes may
not be the by-product of the Fed's easy policy, but one of its key
goals. Bernanke alluded to the positive effect of higher stock
prices through the wealth effect mechanism. He was also at pains to
emphasize that monetary policy was not the panacea for all the
issues facing this economy. Uncertainty on domestic fiscal issues
(fiscal cliff) and the global growth concerns are the bigger issues
for the economy than lack of liquidity.
KRAFT FOODS INC (KFT): Free Stock Analysis
UNITEDHEALTH GP (UNH): Free Stock Analysis
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