If anyone says to you that they predicted what the Federal Reserve did on Wednesday, run away from them. They’re dishonest.
No one, I mean, no one went out on a limb to say Federal Reserve Chair Ben Bernanke would stand pat on the government's economic stimulus by continuing its $85 billion per month bond-buying program. The debate wasn’t whether it was done. It was how many billions would be taken out of the stimulus program.
The market reaction was dramatic. Investors bought just about everything: Stocks, bonds, gold. The reason? The easy money (at least at the macro-economic level) was going to continue unabated for at least a few more months.
The issue now is what to make of the non-move move.
First of all, it is clear that Chairman Bernanke does not trust two things: Congress and the American economy.
The unemployment rate is nowhere near the 6.5% that the Fed indicated it would be when it could raise rates. Also, let’s be honest, the real unemployment rate is well above the reported 7.3% national average given that so many people have left the workforce entirely--and not just for retirement.
By not beginning the wind-down process of the Fed's unprecedented amount of monetary stimulus to get the American economy powering along--many simply call it “printing money”--Bernanke is indicating that the economy is not ready to grow and thrive on its own power.
So, it’s wonderful when stocks go up, and the value of Americans' 401Ks go up with it; however, the underlying reason for that is a continued underperformance of the U.S. economy.
Then, there’s Chairman Bernanke’s disdain for Capitol Hill. Whether it be threats of a government shutdown or a refusal to raise the debt ceiling, Congress could do severe damage to economic growth in the coming weeks. Most likely, we have learned our lessons on these issues, but Bernanke must deal with any potential threat to the economy. Because there is no certainty as to what will happen with Congress’ fiscal policy, that unknown is a “potential threat” and thus forces Bernanke to be conservative with his policies.
When you put all that together, it should not be such a shock that the Federal Reserve changed nothing. The problem there is why some economists, analysts and investors are upset about what happened.
The Fed had already all but said it was going to reduce bond buying by the end of the year. Those who parse the language of the Fed assumed it was a certainty and feel duped by Bernanke’s own words. Speculation is that it’s a form of scolding by Bernanke himself: Look at the numbers as much as you mark my words.
There is one more Fed meeting this year when we will hear from Chairman Bernanke in a news conference. It is one more opportunity to begin the end of quantitative easing and begin the path toward truly knowing the relative strength of the American economy.
Just a hint here: Don’t be 100% confident that you know what Bernanke will say--and what he will do.