Late yesterday, the Federal Reserve released the minutes from their last policy-setting meeting. In the minutes, Bernanke & Co. all but guaranteed investors that the Fed would fire-up the printing presses for a third round of money printing. The Fed has been dangling the carrot of QE3 in front of investors for months now. That’s partly why the S&P 500 held up better than foreign markets during the summer sell-off and why U.S. stocks are still up double digits for the year. But the meeting minutes signal that the Fed has decided to pull the trigger on more stimulus next month. Just in time for the election.
What is the justification for more misguided monetary activism? The stock market is bordering on a post-crisis high, short and long-term interest rates are at record lows, the housing market is improving, inflation is at the Fed’s target, and economic growth, while it could be better, is still OK. Those don’t sound like the conditions that warrant emergency monetary policy. According to the Bernanke Fed, the problem isn’t so much the current state of affairs, but the Fed’s forecast for the state of affairs two years hence. To Wit (emphasis is mine):
Nonetheless, many members expected that at the end of 2014, the unemployment rate would still be well above their estimates of its longer-term normal rate and that inflation would be at or below the Committee’s longer-run objective of 2 percent. A number of them indicated that additional accommodation could help foster a more rapid improvement in labor market conditions in an environment in which price pressures were likely to be subdued. Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery. Several members noted the benefits of accumulating further information that could help clarify the contours of the outlook for economic activity and inflation as well as the need for further policy action.
Frightening, wouldn’t you agree? We have a group of academics setting monetary policy based on an economic forecast that is more than two years into the future. Have Bernanke & Co., forgotten that monetary policy works with long and variable lags? The hubris here is palpable. And it isn’t even justified given the Fed’s forecasting record. Like most economists, the Fed has an abysmal record of forecasting turning points in the economy. In 2007, the Fed forecast unemployment in 2009 of 4.8% to 4.9%. Actual unemployment in 2009 was 9.9%. In the fall of 2008, the Fed was looking for unemployment to be 6.5% to 7.3% in 2010. Actual unemployment was 9.6%. The Fed was closer to the mark last year, but one out of three gets you an F.
What’s more is that a third round of money printing may not even boost asset prices as the Fed desires. As I mentioned earlier, the stock market is already bordering on a post-crisis high. In relation to normalized profits, stocks are far from cheap. And with revenue and earnings growth slowing sharply, investors may be reluctant to bid up stock prices further. So why bother with a third round of money printing?
Alas, we learn the goal of the Fed’s continued monetary malfeasance is not to stimulate growth it is to boost consumer and business confidence.
Participants also exchanged views on the likely benefits and costs of a new large-scale asset purchase program. Many participants expected that such a program could provide additional support for the economic recovery both by putting downward pressure on longer-term interest rates and by contributing to easier financial conditions more broadly. In addition, some participants noted that a new program might boost business and consumer confidence and reinforce the Committee’s commitment to making sustained progress toward its mandated objectives.
I’m not sure on which planet a massive increase in potentially inflationary high-powered money creates confidence, but it ain’t this one. Unconventional Fed policy is one of the greatest sources of uncertainty for businesses and consumers today. Uncertainty doesn’t boost confidence, it kills it.
The Bernanke Fed long ago lost its bearings on the role and purpose of monetary policy. A third round of money printing is going to push the economy deeper into the easy-money abyss and make the escape much more difficult and painful. We continue to favor a cautious investment approach, as should you.
Jeremy Jones, CFA
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