I listened intently to Fed Chairman Ben Bernanke’s speach, and these are my takeaways.
I believe the FOMC believes it is in uncharted waters. I do not believe the FOMC is confident that its quantitative easing measures will have the desired effect. His speech stated clearly that unintended consequences will arise, but that these new tools have uncertain outcomes as well. Instead of being able to lower rates, the FOMC is limited.
Underlying his general economic assessment, I believe Bernanke wants to raise interest rates. He wants to raise interest rates so that he can use normal policy measures to offer stimulus in the future. I believe that he is uncomfortable with the current state of the economy, uncomfortable that the FOMC is unable to do anything meaningful to change it, and probably more uncomfortable with the political environment and the debt levels of the country.
My takeaways suggests that QE2 is a relative desperate measure on the part of the FOMC, not only do they not know its effectiveness but they realize that consequences exist, and if this effort does not provide the desired consequence targeted by the committee, the result will prove that there is absolutely nothing the FOMC can do to curb economic weakness if it continues.
In my opinion, if this were a poker table the FOMC is pushing all of its chips to the center.
My longer-term economic assessment tells me, as I have proven to you, that economic weakness will continue. We are in the third major down period in US history according to the Investment Rate, and the weakness does not end for quite a while. We are many years away. That tells me to expect additional economic weakness, it suggests that QE2 will uncover the ineffectiveness of the FOMC now that interest rates are 0%, and further QE2 will put additional pressure on GDP without raising core inflation measures. Volatile food and energy prices are already surging, thanks to the lower dollar, and consumers who are already strapped will have reduced free cash flow to spend on non-core items as a result. Without the velocity of money, inflation rates will not increase.
A desperate measure, a desire to raise rates, uncharted waters, and obviously unintended consequences makes this a very risky proposition, one that will likely turn out to have an extremely negative impact.
Disclosure: no conflicts