Archive for June, 2012
by Jonathan Bernstein
Before the ink dried on last Friday’s employment report, lots of people who should know better screamed that the Federal Open Market Committee is “absolutely” going to initiate a new round of QE June 20. Not so fast.
When we think about this from the Fed’s point of view, as opposed to what we might want to see as investors, a new QE launch in June appears unlikely. While I don’t claim to know what the FOMC thinks, I’d expect June action only if Greece’s anti-bailout party, Syriza, comes to power in the June 17 elections and a crisis results. That possibility seems to be fading right now.
New QE in June Would Look Like Ready, Fire, Aim at the Fed
The Fed is a large and somewhat tradition bound institution. Despite its new-found, post crisis penchant for decisive action, announcing a whole new QE program before the current Operation Twist concludes at the end of this month would not exactly make the Fed look good. Why admit that Twist failed to generate a self-sustaining recovery before even completing it?
Secondly, before last year, the Fed hadn’t hadn’t done much “Twisting” since the early ‘Sixties. In the normal course of events, if that still exists, one would expect the Fed’s Division of Research and Statistics to examine what today’s Twist did and did not do, before launching a whole new effort.
I’m not suggesting that the Fed will wait for anything like a definitive study here, there’s no way they have time. After all, monetary theorists traditionally say that the effect of Fed action takes around 18 months to cycle through the system, and the Fed won’t wait until 18 months after Twist ends, to start assessing it.
But when the Fed moves next, they will look better if Chairman Bernanke can explain clearly why he had to move and what his previous moves accomplished. It would be easier to make the case for yet more QE, with a retrospective analysis of Twist in hand.
Fed Has Reason to Hold onto its Ammunition Rather than Use It Up Too Quickly
Third, there is a strong argument, that the successive incarnations of QE have produced less and less of an economic bounce. If QE is producing diminishing returns, the Fed would want to hold its fire as long as it can, rather than get too early to the point where it is less and less able to make a difference. (Other than maybe to stock prices, that is.)
Fourth, while I have argued since August 2010 that the crisis has only been papered over, and not fixed (and more QE would just be additional papering over) the current statistics show current GDP growth of about 2%. That is the the so-called “stall speed,” but not outright recession. I’m not sure the economy is weak enough to force the Fed’s hand right now.
Don’t Count on Election Year Stimulus to Bail the Markets Out
So if the Fed isn’t about to move, shouldn’t people be long stocks because “it’s an election year and you can always count on politicians to do whatever it takes to goose the economy?” Not this election year. The Constitution requires all tax and spending bills to originate in the House of Representatives, which the Republicans control.
I can’t see the House Republican leadership allowing any kind of stimulus bill out of committee this year, much less to the floor, unless the economy gets so weak that preventing stimulus would embarrass the Republicans. Rightly or wrongly, the President gets the credit (or the blame) for the nation’s economic performance, and why would Republicans make Obama look good?
Nor do I think Bernanke really wants to bail out Obama; Bernanke is a Republican, even though he was so apolitical in his former academic career, that few of his Princeton colleagues knew what party he belonged to before George W. Bush appointed him. That said, Bernanke’s record shows that he does bail out banks.
If he launches QE, he will do so in large part because the Greenspan/ Bernanke Fed has confused its mission to protect the safety and soundness of the banking system, with a mission to protect banks’ profits and bankers’ bonuses. My point is, Bernanke will move for his own reasons, and not because he wants to re-elect President Obama, even if Obama might become Bernanke’s incidental beneficiary.
Indeed, Bernanke has little personal reason to care who wins the Presidency; it’s a decent bet that he remains Fed Chairman either way. Obama re-appointed Bernanke when he had the chance to appoint someone else. Bernanke’s proven bank-friendliness and Republican credentials may also appeal to Romney.
Buying QE—or Election Year Stimulus — is a Sucker Bet Here
Bottom line: the Fed will likely act after it has had time to get its post-Twist bearings and enough weak economic data come in to support its case. Investors who buy now on the premise of QE3 in June run high risks of disappointment; buying for election year stimulus also appears foolish.
The only reason to buy stocks is the obvious one: if you have a proven approach and the stocks meet your criteria. Betting on political events this year looks like a mug’s game.
Disclosure: No positions relevant to this discussion.
This post has been updated.