Kerri Shannon: If you’re handicapping the U.S. Federal Reserve’s two-day Federal Open Market Committee (FOMC) meeting that concludes today (Wednesday), you can make the following two predictions – and you’ll almost certainly be right:
- U.S. Federal Reserve Chairman Ben S. Bernanke will announce some form of economic stimulus.
- But the short-term benefits will be small, and any long-term benefits won’t be enough to help out-of-work Americans or jump-start the wheezing U.S. economy.
“I do think the Fed will intervene,”Money Morning Chief Investment Strategist Keith Fitz-Gerald said in an interview. “But I don’t believe for a second that the central bank’s intervention will help the U.S. economy.”
If anything, the nation’s economy looks worse today than it did on Aug. 9, which is when central-bank policymakers last met. The “official” unemployment rate remains at an alarming 9.1% – with no jobs added in August – and true joblessness may range from 17% to 23%. Housing starts declined last month by the greatest amount since April. And the International Monetary Fund (IMF) just downgraded its U.S. growth forecast to 1.5% from 2.5% [To see related story in today’s issue, please click here].
The spreading European sovereign debt crisis continues to whipsaw stocks (NYSE:SPY), oil prices and gold (NYSE:GLD). And several dramatic single-day plunges – in stocks and in gold – spooked investors for days after the event.
Bernanke feels pressure to act, but the odds that Federal Reserve policy can make a meaningful splash are low indeed, Money Morning‘s Fitz-Gerald says.
What to Expect From Today’s FOMC Meeting
Since the Fed’s actions have so far done little to ignite economic growth, investor expectations were muted ahead of today’s FOMC meeting conclusion.
“It looks like the market is baking in an announcement of some kind of quantitative-easing strategy,” Deirdre Dennehy, portfolio manager at Rockland Trust, said in an interview. “[But] for them to announce a QE3, I’m not sure how impactful that’s going to be. The more times they do that, the less the effect in the market.”
Analysts expect the Fed will attack longer-term rates by adjusting its $1.7 trillion portfolio of U.S. Treasury securities.
At its last meeting, the Fed announced it would keep short-term rates near zero until 2013. Since the central bank has no more room to reduce rates, this time it’ll make a move to encourage borrowing and spending.
“My guess is it’s going to look something like “Operation Twist” from the 1960s,” Fitz-Gerald said in a Bloomberg Radio interview. “They’re going to probably print more money, buy more Treasuries. They’re looking to manipulate, or twist, the yield curve by flattening it out.”
The government first used this “Operation Twist” tactic in 1961. The expectation is the Fed will sell debt maturing in three years or less and buy mostly seven to 10-year notes to flatten out the yield curve so that long-term borrowing gets cheaper. The goal is to get corporations to spend their cash piles and push investors out of safe-haven Treasuries and into stocks.
“They’re literally trying to force scared consumers and scared investors into the market,” said Fitz-Gerald. “They’re trying at the same time to free up that logjam of funds that corporations are, in fact, sitting on.”
Markets have already anticipated a move like “Operation Twist,” and yields on 10-year Treasury notes have slipped to 1.94 % from more than 3% in July. That’s the lowest yield on the Treasury notes in more than 50 years. But the Fed move could still lower the 10-year rate by another quarter-point at today’s FOMC meeting
If billions of new dollars are actually pushed into the financial markets by a central bank action, the stock-and-bond markets will see some gains. But any such gains will be short-term in nature – just as they were after earlier quantitative -easing measures, Fitz-Gerald said.
“Look at what happened when Bernanke waded into the market with QE1 [and] QE2 … the markets tended to like that,” Fitz-Gerald said. “But longer term, the economic system is very different from the market system, and that’s the underlying issue here.”
C entral-bank policymakers do have a couple of other policy options. According to minutes from its last meeting, the Fed could opt to trim the 0.25% rate it pays banks that store excess reserves at the central bank.
It could also institute a third round of bond buying, or QE3. But policymakers are likely to avoid this maneuver, due to the heavy criticism that followed QE2.
Anything the Fed does announce is expected to be a small initiative, with more aggressive action held until the next meeting in November.
“These are tinkering measures, not the financial bazooka, so to speak,” Carl Riccadonna, senior U.S. economist for Deutsche Bank AG (NYSE:DB), told Reuters. “If we get to a period where the employment numbers turn negative – then I think there will be much more agreement on the Open Market Committee that they will have to do something bolder. We’re certainly not there yet.”
Regardless of what weapon the Fed chooses, investors are clearly skeptical that Team Bernanke can draw a winner from its arsenal at today’s FOMC meeting.
“With banks still repairing their capital positions and interest rate levels hardly an impediment to growth, the Fed has run out of effective tools to do anything more than marginally affect markets, and whatever it does from here is basically politically driven and will have little economic impact,” Josh Shapiro, chief U.S. economist at MFR Inc., wrote to clients.
The Fed is scheduled to announce any actions recommended at today’s FOMC meeting at 2:15 p.m. EDT.
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