What if the Fed does nothing?

The central bank is expected to announce a new stimulus plan Thursday, but it could hold off. While that would surprise and annoy investors, there may be good reasons.

By Charley Blaine Sep 12, 2012 8:39PM
Could Ben Charley BlaineBernanke and the Federal Reserve do the unthinkable and do nothing Thursday?

It sure would surprise Wall Street and the legions of economic pundits who expect the Fed to announce a new round of economic stimulus after its two-day meeting concludes Thursday afternoon.

If you're an investor, you undoubtedly would be very unhappy, and the result would probably be an abrupt and sharp sell-off in the market.

But it could happen, and I'd venture to say there's a 40% chance the Fed's rate-making body, the Federal Open Market Committee, will hold off on a big change.

Post continues below.
The consensus is the Fed will announce some form of the following:
  • It will say it expects its key federal funds rate -- what banks charge each other for overnight loans -- will remain at extraordinarily low rates through some time in 2015. The promise now is low rates through 2014. All U.S. rates are built on the fed funds rate, now 0% to 0.25%.
  • Some continuation of Operation Twist. It sells short-term securities and buys longer-term bonds. The idea is to put downward pressure on long-term rates.
  • Some sort of asset purchase. This gets the moniker "quantitative easing," or QE. That might mean buying mortgage-based securities. It also might mean something larger, like Treasury securities.
Here's why the Fed might punt.

The economy isn't in that bad a shape. Yet. Yes, the unemployment rate is 8.1%. Yes, the economy added only 96,000 jobs in August and, yes, there were fewer jobs created in June and July than first estimated.

And it is true that Fed Chairman Ben Bernanke believes high jobless rates are of "grave concern."

But there is life in the housing market. Auto sales have been fairly robust all year. And retail sales have been fairly strong. If that's the case, what's the rush?

And 4.1 million jobs have been added back into the economy since the job market bottomed in February 2010 out of 8.7 million jobs lost between March 2008 and February 2010. Admittedly, that total doesn't include around a half-million or so high-paying residential construction jobs. It also doesn't include thousands of auto-manufacturing jobs lost.

There's an inflation risk in asset purchases. Inflation hawks make this argument. And it's true there's been food- and energy-price inflation over, say, the last 24 months. Because of a major drought this year, we could see a nasty bout of food-price inflation next year. And there have been tensions in the Middle East that have allowed speculators to bid oil prices and gasoline prices higher.

QE doesn't work. This is a big debate, inside and outside the Fed. The Fed has tried two rounds of quantitative easing already -- between April 2009 and March 2010 and  from November 2010 through June 2011. The economy added some 1.6 million jobs during the first round and another 1.05 million in the second round. All due to quantitative easing? Maybe not, but it probably helped.

Now is not the time. This may be the best argument for punting now, and I've heard the idea and read about it several times in the last few days. You may need QE later, like during the winter, if Congress can't agree on how to get past the fiscal cliff. That's the combination of the expiration of Bush-era tax cuts and big cuts in federal spending across the board.  That would almost certainly slow the U.S. economy down quickly. And if Europe's shaky financial system isn't shorn up, another round of QE might provide ballast for the domestic economy.
55Comments
Sep 12, 2012 9:14PM
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the best argument for punting would be the Fed knows it can´t save the economy with monetary smoke and mirrors, so they are better off keeping QE as a threat than a reality... 
Sep 13, 2012 10:01AM
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The Fed should do nothing, there is nothing wrong with THEIR policies, it's the government that is waffling and not doing their job. How would injecting more money to businesses create more jobs with no demand for goods with 15 million people still not working? I think the American people are starting to realize that The Reserves job is to protect the dollar, the governments job is too protect the people. The dollar is still strong against world currencies, and we know about the job markets.
So if the Reserve does nothing, stocks will tank and the manipulators of Wall Street will lose money, nothing more, nothing less.
Sep 13, 2012 9:43AM
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Charley, The Fed has to punt.  Until congress authorizes higher spending limits, the Fed can't issue any more money.   Bernanke has been unable to send more money to Europe which has been the real delema there for the last six months and without the cash from the US we are seeing China's economy stall.  We still do not have the facts on the amount of money that we lost through the IMF in the refinancing of Greece.  What do you expect Bernanke to do, lower interest rates?

Selaretus,  The BLS which claimed to show 96,000 jobs created in August actually showed a net loss of 119,000 jobs.  And although only 8.1% of the us population is collecting unemployment, Only 58.3% of employable Americans have jobs (13.3%) are part time, a decrease from July.  Of those who do work, the average workweek is only 36 hours.  Don't count on the press to report the facts.  They are only printing what you want to hear.
Sep 13, 2012 9:47AM
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what if the zombies do nothing?  hmm

 

Iceland put bankers in jail

 

iceland is my hero

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If we took all the money from all the rich, we would not have enough to pay off the US $16 Trillion most of which we owe to China.  We still borrow 40% of our budget from them. 

 

If one of these days the Chinese say, we now own your country and you will do as we say or we will not loan you anymore of our hard earned fake Renminbi.   Where would that leave us in this Ponzi scheme of life?   One giant worldwide depression.  Who are the smart people in Washington that put us into this scenario? 

 

VOTE November.

 

From the internet:

The Monetary Mess and how Obama inherited it.  

This tells the whole story, why Bush was so bad at the end of his term.

If in doubt, check it out!

The day the democrats took over was not January 22nd 2009, it was actually January 3rd 2007, the day democrats took over the House of Representatives and the Senate, at the very start of the 110th Congress.

The Democrat Party controlled a majority in both chambers for the first time since the end of the 103rd Congress in 1995.

For those who are listening to the liberals propagating the fallacy that everything is "Bush's Fault," think about this:

January 3rd, 2007 the day the Democrats took over the Senate and the Congress:

The DOW Jones closed at 12,621.77

The GDP for the previous quarter was 3.5%

The Unemployment rate was 4.6%

George Bush's Economic policies SET A RECORD of 52 STRAIGHT MONTHS of JOB GROWTH

Remember the day...

January 3rd, 2007 was the day that Barney Frank took over the House Financial Services Committee and Chris Dodd took over the Senate Banking Committee.

The economic meltdown that happened 15 months later was in what part of the

economy?

BANKING AND FINANCIAL SERVICES!

Unemployment... to this CRISIS by (among MANY other things) dumping 5-6 TRILLION Dollars of toxic loans on the economy from YOUR Fannie Mae and Freddie Mac FIASCOES!

Bush asked Congress 17 TIMES to stop Fannie & Freddie - starting in 2001 because it was financially risky for the US economy.

And who took the THIRD highest pay-off from Fannie Mae AND Freddie Mac? OBAMA

And who fought against reform of Fannie and Freddie? OBAMA and the Democrat Congress

So when someone tries to blame Bush..

REMEMBER JANUARY 3rd, 2007.... THE DAY THE DEMOCRATS TOOK OVER !"

Budgets do not come from the White House. They come from Congress and the party that controlled Congress since January 2007 is the Democrat Party.

Furthermore, the Democrats controlled the budget process for 2008 & 2009 as well as 2010 & 2011.

In that first year, they had to contend with George Bush, which caused them to compromise on spending, when Bush somewhat belatedly got tough on spending increases.

For 2009 though, Nancy Pelosi & Harry Reid bypassed George Bush entirely, passing continuing resolutions to keep government running until Barack Obama could take office. At that time, they passed a massive omnibus spending bill to complete the 2009 budgets.

And where was Barack Obama during this time? He was a member of that very Congress that passed all of these massive spending bills, and he signed the omnibus bill as President to complete 2009.

If the Democrats inherited any deficit, it was the 2007 deficit, the last of the Republican budgets. That deficit was the lowest in five years, and the fourth straight decline in deficit spending. After that, Democrats in Congress took control of spending, and that includes Barack Obama, who voted for the budgets.

If Obama inherited anything, he inherited it from himself.

In a nutshell, what Obama is saying is I inherited a deficit that I voted for and then I voted to expand that deficit four-fold since January 20th.

 
Sep 12, 2012 10:11PM
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I would love to punt a banker out a ****ing window!!!!!!!! Use a lawyer or politician to break the fall! 
Sep 12, 2012 10:15PM
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Didn't  Moody say yesterday, if the don't start getting the debit under control , then they would take steps to downgrade.. So how does QE3 come close to getting debit under control..

I hope Europe has room in their boat for us.

Sep 13, 2012 6:41AM
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The Fed cannot create jobs,all they do is create inflation by dollar devaluation. Technology has

replaced workers and devaluing to dollar to make labor cheaper and stocks and commodities

more expensive is a scam on the working class. Maybe they should send everyone a printing press and nobody would need a job.

Sep 13, 2012 8:45AM
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"The economy isn't in that bad a shape. Yet. Yes, the unemployment rate is 8.1%. Yes, the economy added only 96,000 jobs in August and, yes, there were fewer jobs created in June and July than first estimated. "

 

See....now here is where I wonder what planet YOU live on because on THIS planet the US and world economies are in a DEPRESSION and not just your typical depression but COMPRESSIVE CONTRACTION...GROWTH IS DONE NEVER TO RETURN!!!! We are all just noodling along trying to make each believe everything is going to be 'OK' but it just isn't. We have kicked the can of accountability as far as it can be kicked and now, thanks in part to the Fed printing worthless toliet paper Benny Bucks, there MUST be a contraction of economy to match to new level of much much lower activity. So whether Benny fires up his Benny Bucks printing press or he doesn't, and it does not matter WHO is elected in Nov., the Reality Party wins the election and it's time to pay the fiddler, the fat lady has sung.  If we do not manage contraction, contraction will manage us. Wake the f**k up and stop dreaming.

Sep 13, 2012 9:28AM
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I hope Benanke gives them his money, so the millionaires in the market can get their bonuses.Maybe he will give them his instead of our tax dollars.

I know you investors will be unhappy if Bernanke doesn't give you money for your investments to profit by.

In November there will be a house cleaning. So make it while you can.

 

Sep 13, 2012 8:22AM
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And for all you ball fans out there who are unfamiliar with the GLB act mentioned below...

The Gramm–Leach–Bliley Act (GLB), also known as the Financial Services Modernization Act of 1999, (, 113  , enacted November 12, 1999) is an of the (1999–2001). It repealed part of the , removing barriers in the market among companies, companies and companies that prohibited any one institution from acting as any combination of an , a , and an . With the passage of the Gramm–Leach–Bliley Act, commercial banks, investment banks, securities firms, and insurance companies were allowed to consolidate. The legislation was signed into law by President .

A year before the law was passed, , a commercial bank , merged with the insurance company in 1998 to form the conglomerate , a corporation combining banking, securities and insurance services under a house of brands that included , , , and . Because this merger was a violation of the Glass–Steagall Act and the , the Federal Reserve gave Citigroup a temporary waiver in September 1998. Less than a year later, GLB was passed to legalize these types of mergers on a permanent basis. The law also repealed Glass–Steagall's conflict of interest prohibitions "against simultaneous service by any officer, director, or employee of a securities firm as an officer, director, or employee of any member bank."

NOW can you see where it all went wrong?
 

Sep 13, 2012 8:34AM
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Anybody here thinking there won't be a crash is nuts. Nothing will get done other nations want to abandon the dollar oil is traded in dollars then the dollar is worthless. We cannot pay back 14trillion national debt plus 40 trillion in business and household debt. Plus government pensions SS and SS disability medicare medicaid. It's 200 trillion in obligation. Start storing food and water.
Sep 13, 2012 9:03AM
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WoW...

Yesterday futures where UP awaiting The FED ...

This morning they are Down awaiting the  same Info...?

Yall need to make your mind, will it be UP or Down...lol

Better yet...just wait and see what they do before spreading the snake oil...

 

Sep 12, 2012 10:20PM
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Yea, Bubble, I think you hit the nail on the head. Keep the threat of QE alive, and the bears will hide. Stocks go up, people feel wealthy they spend money, economy comes back...however, people I think are done "spending money". I for one am stashing everything I have either in investments or metals. Would love to purchase A small farm for when the train de-rails, least then I could support A hippie commune of slaves.
Sep 13, 2012 8:21AM
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Ben Dover Bernanke has already proved he acts out of desperation by demonstrating his one trick pony show.  He was, is, and always will be a moron that needs to be punished for the irreparable harm he has caused our great nation.  To expect him to do the right thing now is dreaming.
Sep 13, 2012 7:31AM
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I'm hoping the Fed does what it does best...nothing, otherwise it just begs for the liquidity trap to be sprung.
Sep 13, 2012 7:32AM
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As much as I would like to see another QE to drive my metals higher I would rather see the country do the right thing for once. Have draconian cuts and bite the bullet on spending this will actually drive the markets higher in itself instead  of phony bond buying with the printing press.
Sep 13, 2012 9:47AM
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If the Fed punts, Wall Street will just see it as a postponement of events they expect will still occur in the future. That, ironically could be positive for stock and bond prices.

 

But, it’s all bad for free, fair, and efficient capital markets and sound money. It only proves even more that it’s now all about what the Fed and Central banks will do. The central bank and its controlling cartel of too big to fail banks in the private sector now are the market. The entire multi-trillion dollar balance sheet of the Fed is a direct measure of the wealth they have stolen from the rest of us by printing money from thin air.  

Sep 13, 2012 10:58AM
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They will keep giving the banks and wall street tax payer money till Obama is out of office. Vote them all out.
Sep 13, 2012 5:13AM
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I like the argument in the last paragraph.  Best to save QE 3 for when the grid lock threatens to drive the economy into a ditch again.
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