Is the Fed Holding Its Powder Dry or Hiding the Fact that it is Running Out?
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According to FOMC minutes released today, Fed committee members fretted about developments in the euro area and weaker-than-expected economic data in the United States during their meeting in June. While that is all well and good, investors wanted to know exactly what the Fed plans to do about it. Specifically, they wanted to know if the Fed was going to push the button on QE3. Unfortunately, the Fed minutes gave no clues they were planning to pull the trigger on QE3, nor did they paint a clear picture on what exactly would foretell said QE3. As a result, equity markets sold off immediately following the release of the FOMC minutes.
However, late in the day markets rallied off their lows to finish mostly flat on the day. SPDR S&P 500 ETF (NYSE: SPY) ended virtually unchanged at 134.16 while PowerShares QQQ ETF (NASDAQ: QQQ) was lower by 0.55.
During their last meeting, the Fed extended operation twist, and while this supported markets, it is clear the Fed could do more. With inflation in the U.S. subdued, and with economic conditions clearly worsening, many are wondering what exactly the Fed is waiting for.
After years of easy money in the U.S. it is becoming increasingly obvious that Fed easing is having an increasingly diminished effect on markets, and if the Fed fires another bullet, and if that bullets fails to have the desired effect, the Fed's greatest tool might also be compromised – its credibility, and the perception that it can and will backstop any and all declines in asset prices.
As expected, Fed member Jeffrey M. Lacker was the only member of the committee who voted against extending operation twist during the last meeting. The reason for his decent was because "he did not believe that further monetary stimulus at this time would make a substantial difference for economic growth and employment without also increasing inflation by more than would be desirable."
In other words, he is questioning the effectiveness of both current a future action by the Fed. While he is the lone dissenter on the FOMC, he is clearly not alone in his thinking, as many insiders have expressed similar concerns. Thankfully for equity markets, pessimists like Lacker and like minded individuals are in the minority.
However, late in the day markets rallied off their lows to finish mostly flat on the day. SPDR S&P 500 ETF (NYSE: SPY) ended virtually unchanged at 134.16 while PowerShares QQQ ETF (NASDAQ: QQQ) was lower by 0.55.
During their last meeting, the Fed extended operation twist, and while this supported markets, it is clear the Fed could do more. With inflation in the U.S. subdued, and with economic conditions clearly worsening, many are wondering what exactly the Fed is waiting for.
After years of easy money in the U.S. it is becoming increasingly obvious that Fed easing is having an increasingly diminished effect on markets, and if the Fed fires another bullet, and if that bullets fails to have the desired effect, the Fed's greatest tool might also be compromised – its credibility, and the perception that it can and will backstop any and all declines in asset prices.
As expected, Fed member Jeffrey M. Lacker was the only member of the committee who voted against extending operation twist during the last meeting. The reason for his decent was because "he did not believe that further monetary stimulus at this time would make a substantial difference for economic growth and employment without also increasing inflation by more than would be desirable."
In other words, he is questioning the effectiveness of both current a future action by the Fed. While he is the lone dissenter on the FOMC, he is clearly not alone in his thinking, as many insiders have expressed similar concerns. Thankfully for equity markets, pessimists like Lacker and like minded individuals are in the minority.
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