Gambling Advice for Fed Watchers

Posted by Paul Vigna

What's he doing in there?

If I were a betting man, if I were in the markets and not just somebody who reports on the markets, I’d be betting hard money that the Fed will do nothing today. If I could find anybody to lay odds on that, of course.
It just seems kind of nuts to think the Fed is going to embark on some major initiative today, at the end of its one-day rate-setting meeting. Isn’t the economy healing? Isn’t the recession over? Haven’t the data points been getting better? Then why are so many people thinking the Fed’s going to jump back in with some big support program?

Of course, on the issue of rates, it’s beyond obvious that the Fed’s not going to raise them, despite the fact that the recession is apparently over and the economy growing again. You want to know when the recession will really be over? When the Fed starts raising interest rates.

But the market isn’t focused on that. The market, and not just the stock market, is focused on whether the Fed’s going to announce a new round of quantitative easing, buy Treasurys in order to hold down interest rates (and, oh, if some of that money happens to trickle down to risky assets like, say, stocks, well, they can’t really help that now.) In the market, this is a real question.

Bonds are rising, with a good portion of folks over there expecting something. Stocks are essentially flat, albeit tilted downward; seems stock traders aren’t exactly sure what’s going to happen. Still, whereas in the past the market was fairly certain about what the Fed would do, this time around, it isn’t. I just don’t understand why it isn’t.

The Fed was pretty clear at its last meeting, on Aug. 10. It wasn’t opposed to a new bond-buying scheme, but it would have to see some marked deterioration in the economy. But it hasn’t happened. Make no mistake, things are still dicey, and by the end of August it’s far to say we were teetering. But we’ve once again rather miraculously stepped away from the brink. Things certainly aren’t any worse than in early August. So why would the Fed jump in now?

If the Fed does crank up the printing press, that really ought to tell you everything you need to know about the true state of the economy. It should tell you the economy is closer to the edge than most people think. Of course, it won’t be stated like that, and the market probably won’t take it like that, but that’s the reality. Because at this point the Fed was supposed to be exiting, at this point the Fed was supposed to be unwinding its balance sheet, at this point the Fed was supposed to be unscrewing the training wheels. If it’s not, that’s the real tell.

I’ll be honest with you, there’s a reason I’m not a gambler. I’m not good at it. So I won’t be totally surprised if Ben & Co. do something.

But it won’t be a sign of anything good.