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.
60Comments
Sep 13, 2012 8:12AM
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Here's the NON-consensus that 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 shift from extraordinarily low rates as soon as October. He has to, to stop all of the investor-based lending. All U.S. rates are built on the fed funds rate, now 0% to 0.25%.
Immediate halt of Operation Twist. It sells short-term securities and buys longer-term bonds. The idea is to force responsibility or elimination of banks who have us over-exposed in bad debt instruments.
A ban of asset purchases. You wrote it, you hold it and it better be performing or you won't be. That will mean banning mortgage-based securities. It will also might mean requiring the criteria for credit extension to change.
A call to abolish both the Tax Reform Act and Gramm Leach Bliley Act will be made. Both pieces of crap legislation have caused irreparable harm to the nation. Institutions were not meant to be omnipotent and big businesses without the Founder in place are obligated to maintain national stability through equal opportunity employment that includes executives. If it can be made here it better be, otherwise, importation is terrorism and we have a war on terror right now.  
Sep 13, 2012 8:01AM
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"Targeted stimulas,how about the teachers in Chicago."

 

Why bother writing such nonsense? Two decades ago, Chicago-land was home to 397 of the Fortune 500 companies in America. Between 2000 and 2008, household income there FELL about 10% while costs rose from the exodus of those businesses and the tax revenues they brought in. In a nutshell, big business caused the Chicago and all other bigger population area issues by eliminating jobs, sending them overseas and importing inferior product with an iconic brand label on it.

The stock price for ANY American publicly traded company is about 95% higher than it can support in assets, validity and stability to the nation. Global economics was merely a grubber game. White collar criminals took more than their fair share and will be paying it back in all forms and methods. It's not a threat. We WILL fail and there is no First Class seating on the flight back to self-sustenance.

Sep 13, 2012 7:50AM
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History says- no new QE without a specific validation of progress or target. We all know Europe is heading for collapse. It has massive unemployment, under-employment, a sub-economy, no core and more than one currency unit. Central banks there won't admit failure but they indeed brought it. The debt contracts are bogus because they have no collateral. IF or when they recover jobs, they cannot sustain economy and repay bad debt, so... count on a reconciliation.

America has a bigger problem. It not only has the same massive unemployment, under-employment, a sub-economy and no core... it has tremendous national divide AND holders of both wealth and those debt contracts. Another QE creates a financial-only economy and war; just as it did throughout history. Unless Ben said he will hand every unemployed American sufficient capital to live normally for the rest of their life or to fund a start-up business through it's growth stage, he can only hurt not help us. Banks won't survive this and shouldn't. At least not structured the way they are. I think Ben will tell his member banks to restore the public's economy. He can do that by giving notice that the Bank Rate will adjust straight to 12% in October. Such a move causes little to no trauma to the public but forces indebtedness to run for safety. Debt that cannot be financed into a fixed package will need to be paid off, sending trillions into the institutions, where they will be forced to lend it or lose it (Ben claws back excesses). Instability will fail. We won't be surprised at who that is. Mainly, grossly inflated stocks-- tank big time, as they should.

 

Humans don't purposely put themselves in harm's way but often find themselves there. We People have been there solidly since 2008 and TARP. THREE major stimuli failed to achieve recovery. A fourth leads to war or at least an end to the Fed. Only one course remains- pinch his own banks for action or elimination. Notably, 8 German judges just did that.  

 

Ironically, if you read the anti-Obama and Romney supporter posts here, you get the distinct idea that the GOP can save us. They cannot. Obama is actually on the correct course. Romney will talk flip flop adnauseum... but deep down he knows he was part of the problem and has no solution.

Sep 13, 2012 7:48AM
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Targeted stimulas,how about the teachers in Chicago.Instead of a 16% raise give them 25%,don't make them show any improvement in student scores,let them retire at say 45, full benifits,lets make double dipping mandatory.Senoirity issues,promote them for putting in a 8 hour day 4 days a week,38 weeks a year..Remember It;s all about the Children.Yeah Right!  Spend for the sake of Spending is this Presidents beliefs. I was just thinking,why not give Illinois to the teachers unions much like a large portion of G.M. was given to the auto workers.They both have the same problems,Illinois is broke,the president can say he saved Illinois.
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 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 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 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.
Sep 13, 2012 1:33AM
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MSN MONEY ALWAYS BRINGING THE RAIN CLOUDS INSTEAD OF THE SUNSHINE.

 

is there anyone on this website not involved in short-selling and bashing the market to make a profit?

 

We're going to get QE3 because Bernanke knows that after all of his hints that if he doesn't do it the market will sell off big time and it will be all his fault. We need to do this now because it will take several months to feel the love from it and that love will be right before the do-nothing Republican Congress takes recess in December. Do it Bernanke!!!

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I'm afraid we're going to let everything work its course. I think we will come out stronger on the other side, IF we don't keep adding national debt. I, also believe, we will come out stronger if we never again return to a debt-based growth of the household income (excluding mortgage and auto loan debt).
Sep 12, 2012 11:06PM
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Ben,Take the QE3 money and buy yourself a nice wig!

Sep 12, 2012 10:28PM
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The "threat" might work...Only if we get a budget and spending cuts...?

We are hardly out of the woods yet..And the path is long and winding..

 

Punting a Banker, sounds like a possible new sport, on a Reality Show....Hmmmmm. 

Sep 12, 2012 10:22PM
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I gonna guess 70% chance we have a limited QE3 and not just the Op Twist..??

Interest rates kept low as you suggest..

We need some targeted stimulus, smarter people then I, should be able to  figure it out.

Although indicators seemingly moving in right direction; Believe in History,there was a pull back, foot off the gas pedal and some repercussions ??

If there is any hint of "no budget", near default, no QE3, no jobs bill and not enough spending cuts...

We will fall back into Recession, which will probably be worst then what we had/have...

And being an investor, I do not want to see the Markets correct 10%...

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 12, 2012 10:18PM
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The best reason to punk is the ongoing Presidential election politics.
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 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 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... 
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