When Will They Learn?

| July 15, 2013 | 0 Comments

FedThe Fed makes mistakes.  Let’s get that out of the way first off.  Even the most powerful financial institution in the world can and does screw up on occasion. 

Just look at how Bernanke spooked the market a few weeks ago with his tapering comments.  Even now, mortgage rates are still nearly 1% higher than they might have been had the Fed just kept quiet.

That being said, enormous credit must be given to the Federal Reserve for what the central bank has done for our economy over the last few years. 

Basically, fiscal policy has been off the table due to the extreme bipartisanship in today’s government.  So, it’s been up to the Fed to provide liquidity to banks (in order to keep the public from freaking out and withdrawing all the money). 

And, it’s been the Fed who’s attempted to stimulate the economy through extremely low rates and unconventional bond buying programs.

Now, the true impact of these stimulus programs is murky at best.   However, there’s one thing we can all be sure of – investors love Fed stimulus.

Essentially, when quantitative easing programs have been in full swing, stock prices have gone up and key rates have remained low.  On the flip side, as soon as investors believe the Fed’s going to take the punch bowl away, stocks plunge and rates start rising.

The higher asset prices and historically low rates have both increased wealth and improved the housing market.  The overall impact has been slow and steady growth of the economy.

But, we’re not out of the woods yet.  Unemployment is still high by historical standards.  This quarter’s earnings and GDP are likely to be far lower than what’s ideal.  And, industrial production is struggling badly.

At this point in time, there’s simply no reason for the Fed to stop doing what’s been working.  The economy still needs a boost.  And, there’s been absolutely no sign of hyperinflation – no matter what measure you use.

Nevertheless, some prominent economists are still hollering about the Fed.  For example, David Rosenberg of Gluskin Sheff is highly critical of current Fed policy. 

Rosenberg is a very smart guy and his daily newsletter is top notch.  But, he just doesn’t get it.  Even Bernanke’s mere mention of tapering the Fed’s bond buying sent the 10-year yield up nearly 1%.  That’s a full percent higher than what many people can afford right now.

So what does he expect will happen if the Fed actually starts cutting stimulus?  And where is this inflation he’s so worried about?  If the price of gold is any indication, very few investors are worried about it right now.

Look, the regular models don’t work in this environment.  And, there’s too much at stake to let antiquated views drive policy decisions.  The Fed is far from perfect.  But, Bernanke and the central bank have very likely kept the US from falling into a second Great Depression. 

Bottom line, the Fed needs to keep its proverbial foot on the gas until we’re far away from the woods… and well on the way to the beach.

Yours in Profit,

Gordon Lewis

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Category: Breaking News

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.