Wednesday, August 1, 2012

The Fed Disappoints the Stock Market

The stock market had been up most of Wednesday morning…the Dow-Jones average was up 30 points or more almost from the start.

Somewhere around 2:00 PM, Eastern Standard Time, the Open Market Committee of the Federal Reserve System produced a statement summarizing the results of its two-day meeting.  The gist of the meeting is captured in this sentence: “The committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

The stock market immediately went down.  The Dow moved into negative territory.


Investors in stocks are looking all over for positive news so that they can justify higher stock prices.  Last week they rallied as “Super Mario” Draghi, President of the European Central Bank, promised unconditional support to the Euro.  They rallied the week before on something else…and they rallied earlier on another thing…

Investors were putting their hopes on the Federal Reserve that it would come up with a QE3…or another Operation Twist…or something else…that would possibly help spur the economy on and rationalize buying into a rising stock market.

This, in spite of the fact that the earlier actions of the Fed…QE1…or QE2…or whatever…had done little or nothing to spur on economic growth…bring down unemployment…or anything else.

This is the state that investors…business people…families…find themselves in these days…hoping and hoping that something positive will take place.

In the extreme, it shows us just where everyone is concerning the leadership in the United States…and the leadership in Europe…and the leadership elsewhere in the world.

Two words keep coming up to capture the essence of the situation…uncertainty and risk.

No one seems to know what is going on…and no one seems to be presenting any ideas about how we can move into a better future. 

The only positive spin that analysts could put on the Fed’s statement: “The Fed signaled more strongly it will take action as needed to boost the economy…”

Big whoops!

Man, I learned a lot from this…

But, let’s look at the situation.

For one, there is very little that the Federal Reserve can do to “goose up” the economy at this time.  The Fed acted to stop the liquidity crisis that plunged the financial system into a crisis.  The Fed has done about all it can to calm down the solvency crisis.  The Fed has poured more than a trillion dollars into the banking system to provide time for the banking system to shrink in numbers and the FDIC to close problem banks. 

The Fed cannot make businesses and families borrow.  The Fed cannot hire people and put them back to work.  The Fed cannot eliminate the foreclosures and bankruptcies that are still looming in families, small business, and in local governments.  The Fed can do only so much…

And, to use economic terms, over time a central bank can only impact “nominal” variables, like the monetary base and the money stock and prices, and not “real” variables, like real economic growth and the unemployment rate.

Still, investors were looking for some sign that a (somewhat) trusted institution was going to provide some kind of leadership that would help.

Where there is a vacuum…people keep looking for someone or some thing that will fill in the void. 

In this case, to me, investors were looking for too much.  There is very little that the Federal Reserve can do now.  This is especially true since so many of our economic problems are coming from structural dislocations and not from cyclical movements.  These structural problems that exist within the economy are not going to be overcome, over night.  I have tried to express this repeatedly in my blog.

The good news is that the United States economy is recovering.  Not as quickly as we would like but it is recovering.  There are many potential bumps-in-the-road ahead…like the recession in Europe and the slowdown in the rest of the world…like the “fiscal cliff” facing Congress and the President…along with several other impending problems.  But, the economy is growing.

The bad news is that there seems to be an almost total absence of confidence in our elected officials and their appointees…and in the institutions we used to have so much faith in.  And, until this confidence begins to rise, the structural problems that are the essence of any real future economic recovery will just tend to languish.

Whether or not the Federal Reserve comes up with any more “stimulus” to combat further economic slowdown is irrelevant to me.  I believe that the financial markets should stop looking for their “savior” to come from the halls of the Fed…although, unfortunately, it looks like it might be the only show in the town of Washington, D. C.    

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