Out of Answers, Federal Reserve Can Only Offer Empty Rhetoric

By: Money_Morning

David Zeiler writes: The Federal Open Market Committee (FOMC) is scheduled to issue a statement at 2:15 pm. today (Tuesday), but don't expect anything other than more empty rhetoric.

Indeed, with few options remaining, the Fed is expected to produce little more than a statement designed to reassure the markets following today's meeting.

"If the Fed were smart, they would use this meeting to take decisive action," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Sadly, though, I think they'll lay low and issue yet more hollow statements filled with information that at this point constitutes less than fluff."

At this point, few bullets remain in the Fed's chamber; interest rates have been near-zero for almost three years, and two programs of "quantitative easing" over the past two years have pumped $2.3 trillion into the U.S. economy.

In an attempt to show it was doing something to help the economy, the central bank said last summer that it would maintain rates at that level until mid-2013.

And while the Federal Reserve is not expected to announce immediate plans for more quantitative easing - QE3 - many believe some sort of accommodation, probably directed at the housing market, is coming next year.

"There is a 75% chance the Fed will buy mortgage-backed securities in the first half of the year, possibly by January," Lou Crandall, chief economist at Wrightson ICAP LLC, told MarketWatch.

A series of relatively positive economic reports in recent weeks - unemployment recently dropped to 8.6%, while consumer spending and manufacturing have edged upward - has eased the pressure on the Fed to take any more action this year.

As part of its strategy to maintain optimism in the markets, the FOMC will likely promise to pump more money into the U.S. economy at some point next year.

"The numbers are getting better, but not enough to keep [the FOMC] complacent," Crandalltold MarketWatch.

Word Games
Recognizing that its options are limited, the Federal Reserve instead will focus today on the one thing it can provide in near-limitless supply - words. Today's meeting is expected to focus on a new communications strategy that will offer more details on the Fed's goals for inflation and unemployment - its dual mandate - and how it plans to meet them.

The idea would be to remove uncertainty from the markets about the Fed's intent and push market interest rates closer to where the Fed wants them to go.

In addition, some FOMC members, including Fed Chairman Ben S. Bernanke, want to set specific targets for inflation and unemployment.

But if the Federal Reserve does choose to offer more detailed goals and plans, it will need to be careful it doesn't box itself in, as it needs to retain flexibility in responding to changing economic conditions.

"Don't tell me there's a definite path you're going to follow in the middle of a storm," John Silvia, chief economist at Wells Fargo Securities LLC, told Bloomberg News. "How clear can you be on policy given the uncertainties in the economy and other policies globally?"

Money Morning's Fitz-Gerald doesn't think setting targets will make much difference anyway.

"All the Fed can do is set targets and manage toward those targets," Fitz-Gerald said. "But the markets have always had a mind of their own and will dictate reality."

Irresponsible Fed
Fitz-Gerald says the FOMC's policies of low rates, quantitative easing and ultimately empty rhetoric are the opposite of what it should be doing.

"The responsible thing for Bernanke to do would be to show some backbone and start raising interest rates," Fitz-Gerald said, "which would both demonstrate the validity of the dollar and begin to extinguish inflationary embers that are already aglow."

Fitz-Gerald does not see that happening anytime soon, however, "because the Fed tends to overcompensate by keeping monetary policy too tight or too loose for too long."

Instead, Fitz-Gerald cautions investors to remain wary of what he does expect from Bernanke and his FOMC cohorts - more reassuring statements.

"All they can do is issue statements and hope people place faith in them," Fitz-Gerald said. "But hope is perhaps the most dangerous of all emotions when it comes to the stock market."

Source :http://moneymorning.com/2011/12/13/out-of-answers-federal-reserve-can-only-offer-empty-rhetoric/

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