Daily State of the Markets
Good morning. As a self-proclaimed amateur economist, I don't claim to know the inner workings of the Fed's policies, programs, and facilities. However, as someone with a Ph.D. from Wall Street's School of Hard Knocks, I do feel like I have a decent understanding of the Fed's goals and objectives. As anyone who has studied economics knows, the Fed has what is called a dual mandate. This means that Mr. Bernanke and his cohorts have two jobs: (a) Full employment and (b) Stable Prices (meaning a steady rate of inflation).
Up until now, I have been a big fan of Ben Bernanke's work. As a market professional, I appreciate his approach to communication and the transparency provided by the Bernanke Fed. Gone are the days when you needed to listen intently and decipher every syllable of the Fedspeak uttered by his predecessors. No, nowadays, Mr. Bernanke tells us what the Fed's plans are and how long they are going to be in place. I'm also of the mind that Gentle Ben was a big asset during the credit crisis when he really got creative with new and innovative facilities in order to get credit flowing again.
In addition, I admire his unwavering efforts to keep the U.S. from entering a Japanese-style deflationary spiral, which, by the way, has occurred in this country before - only we called it the Great Depression. Mr. Bernanke, who, as you are probably aware, is one of the country's utmost scholars on the subject. And on that topic, I respect the fact that the Fed Chairman took the precautionary measure with the economy last summer when he introduced us to QE2 (and the "buy everything" trade). However, in all honesty, I'm not sure what else the Fed Chairman can do right now in order to satisfy what is the most important mandate right now - job growth.
If I'm not mistaken, interest rates have been at generational lows for several years now. In checking the data, I see that the Fed Funds rate has been moving down since the fall of 2007 and that the current Target Rate of 0% - 0.25% has been in place since December 2008.
So, with the economy still struggling last summer and nowhere else for the Funds Rate to go, Mr. Bernanke dug deep into the Fed's bag of tricks and decided to start buying up bonds directly. This, again, was designed to push rates lower and to give the economy all the help it needed in order to reach "escape velocity." Kudos to Bernanke & Co. for the effort.
But unfortunately, and perhaps through no fault of the FOMC's, the plan isn't working. Rates are as low as they've ever been but the economy and, more importantly, job growth is languishing at very low levels of growth. Sure, we can blame it on the triple tragedies in Japan, the unrest in the Middle East, or the debt debacle taking place across the pond. But the bottom line is the Fed appears to be pushing on a string here.
This just isn't like the good old days where all you had to do in order to get small- and medium-sized businesses to hire was to give them a little incentive. This is no longer an environment where lower rates triggers expansion and/or hiring. No, Americans have learned (the hard way, I might add) about risk. And it is little coincidence that the words risk and debt are both four-letter-words in the eyes of American small business these days.
What I'm attempting to say this morning is that Ben Bernanke's gang has done their job. They have gone above and beyond what has normally been expected of a central bank. They pulled out all the stops and left it all out on the field. But as every championship football team knows, sometimes you need the defense to score some points for you.
In English, this means that perhaps it's time to stop pushing on a string. Perhaps it is time to let nature take its course. Or perhaps it is time to let your defense put up some points for you... Oops, I mean let the boys and girls in Washington try their hand at implementing appropriate fiscal policies. Maybe with Bernanke on the sidelines, these folks could actually try and do some good for a change. But then again, perhaps "operation twist" is safer for everyone involved. And who knows, maybe this time the horse want to drink...
Turning to this morning... Asian markets were mixed overnight while Europe is once again lower for the usual reasons. Here at home, all eyes are on the Fed. Analysts expect to see the FOMC announce "operation twist" today, so stay tuned.
On the Economic front... We don't have any economic data to review before the opening bell, but we will get a report on Existing Home Sales at 10:00 and then the all-important FOMC statement at 2:15 pm eastern.
Thought for the day... Here's wishing you all the best for a productive and enjoyable day...
Here are the Pre-Market indicators we review each morning before the opening bell...
Wall Street Research Summary