I’m sorry. Please excuse me. I have a silly question. What exactly do you mean when you tell us the market is concerned about the “Fed’s decision making process about further easing?”
I ended yesterday’s column with the tongue-in-cheek question above, even though my question contained more than a grain of truth. The market does not care about the “decision-making” process of the Fed (aside from the minutes that detail the inside debate). It seems to me that the market only cares about the decision itself – will the Fed or won’t the Fed initiate more QE?
While job creation remains scarce, however, there could be a silver lining. Expectations are growing that the Federal Reserve will try to stimulate the economy by stepping up its purchases of government bonds. The gloomy jobs report could give the Fed more incentive to act.
It would appear that the market does, in fact, want the Fed to act, at least the response to the Employment report today indicates this. Although the report came in as expected, somewhat, it nevertheless shows the economy is recovering weakly, which inspires this question: Why, exactly, would more QE be a “silver lining?” Perhaps the quote below offers the answer.
The Fed’s goal, if it starts buying bonds again, would be to drive interest rates down further from their already low levels and spark borrowing and spending. Lower rates could also eventually drive investors into riskier assets like stocks or into currencies in countries with more attractive interest rates.
Wow, “spark borrowing and spending” is the Fed’s goal? Isn’t that precisely the formula that brought the house of cards down in the first place. Lower interest rates? Interest rates are already at historic lows. Today, one can get a mortgage for under 4%, and still few are buying. And what about “… drive investors into riskier assets …?” Is the goal here to push folks out of the bond market? How much lower can you push yields, and what happens when this bubble bursts because folks want greater ROI and they actually move into riskier investments? And what about the unnerving rise in the price of gold, which seems to be acting as an alternate form of currency in the global market?
Speaking of currencies, all of this talk of QE seems to be aimed at one thing and one thing only – weakening the U.S. dollar. Yes, it appears to me that the Fed wants and needs a weak dollar. It appears to me the Fed believes a weak dollar is one huge key to economic recovery, and the sorry truth is that this might actually be right – the weaker the dollar, the greater our exports, which means more jobs. This strategy contains a huge risk. We might just be seeing the beginning of the ultimate “game of chicken,” which is beginning to play out in the in the global currency “battles” we are seeing today. The G7 and IMF meeting this weekend will give us all a clue as to who might blink first.
Trade in the day; invest in your life …
