The Fed’s just-announced intention to do little more than buy $400 billion in long-term T-bonds while selling an equal volume of short-term notes by June 2012 is a disappointment to anyone hoping for higher stock prices. Indeed, the numbers involved are substantially smaller than QE2. Even more importantly, QE2 did not involve selling the shorter end of the yield curve. Essentially, in dollar terms, the Fed is taking out exactly what it is putting in via primary dealers. This is no way to juice the markets.
Has Chairman Bernanke ditched his long-held belief that simply reflating the stock market will generate enough confidence to put the real economy on track? Is suppressing long-term interest rates intended as a boost for the housing market? Does it constitute QE 3.0 or just QE 2.5? And finally, if this latest Fed announcement was already “priced in” to stocks, as so many analysts have claimed, then why did the S&P drop almost three percent in just ninety minutes this afternoon?
Perhaps the only near-certainty is that Bernanke and Co. have taken a hint from Congressional Republicans, who recently warned the Fed in no vague terms against direct stimulus-via monetary-policy, also known as money printing. As I wrote on this website in December 2010, the Republicans are growing more restless to take on the Fed—partly out of sheer populist considerations, and partly to stick it to Obama and the Democrats’ 2012 election prospects, which now rest almost exclusively on monetary expansion. Indeed, if today was Bernanke’s “big day” and all he could offer was a modest shell game with short- and long-term Treasuries, we might conclude that something is holding the Fed back. And that something is likely the prospect of revenge from Republicans, following their expected 2012 Congressional landslide.
Because things could get very ugly for the Fed come January 2013, if not sooner. Americans are looking for a scapegoat, and the Fed has never been the subject of more derision than it is now. Millions of Glen Beck fans have discovered that America has a central bank, and they are not happy about it. That Bernanke will have spent most of his tenure under the Obama Administration does not help either. No less than GOP presidential front-runner Rick Perry has talked about treating Bernanke "ugly" if the good Chairman showed up in Texas. Sounds like lynch-mob talk to me.
My guess is that going forward, the FOMC will continue to disappoint those hoping for massive ongoing money printing. However, it cannot pull the plug on bond purchases completely. The U.S. budget deficit is too large, and there is not enough money from private investors to plug it. In short, we will see at least some monetization for a long time to come. I hesitate to say “indefinitely”, as of course this cannot go on forever.