Fed Inaction Spells Improving Economy

by John M. Curtis
(310) 204-8700

Copyright August 24, 2012
All Rights Reserved.                                         

          Meeting in Washington at the Federal Reserve Board Open Market Committee, Fed Chairman Ben S. Bernanke signaled that he would hold off on another round of quantitative easing, or the Fed repurchasing its own Treasury Bonds.  Showing Wall Street has problems interpreting the Fed, traders unloaded shares not knowing the economy’s direction.  When the Congressional Budget Office forecasted Aug. 22 a recession in 2013 if Congress fails to act on the so-called ‘fiscal cliff,” Wall Street started to get defensive.  It didn’t help that billionaire investor Warren Buffet bought over a millions shares in a popular gold fund last week.  When billionaire George Soros followed suit, it told Wall Street to hedge against the market’s potential downside risk.  Bucking bearish predictions, gold jumped about 9% over the past two weeks, spelling a safe haven for skittish equity investors.

             Walking on economic thin ice less than three months before the election, President Barack Obama looks desperate to reassure Wall Street.  Asking the Republican-controlled House to deal urgently with the pending fiscal cliff before the election is wishful thinking.  GOP strategists are busy highlighting Barack’s economic failures and don’t intend to throw him a life-jacket.  Worries over growing unemployment, higher budget deficits and lower tax receipts prompted the CBO to forecast recession in 2013.  Bernanke’s reluctance to start QE3 suggests he reads the economy differently than the CBO.  Driven by Election Year politics, it’s difficult to take the CBO predictions too seriously.  Obama wants the House to preserve Bush-era tax cuts for income earners under $250,000.  Republicans have said no to increasing rates only on taxpayers making above $250,000.

               St. Louis Fed bank president James Bullard indicated the economy had picked up, delaying Bernanke’s decision to start QE3.  GOP officials believe more Fed T-bill purchases debase the currency and add inflationary pressure to the economy.  “He poured some water on the fire of the QE3 talk,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati.  Wall Street continues to get mixed signals on the economy.  Whether political or not, the CBO report threw cold water on Wall Street.  Bernanke’s reluctance to start QE3 suggests the economy continues to grow at a satisfactory rate.  Increase in the government’s unemployment claims also gave Wall Street reason to pause.  Gold prices jumped 2% today to $1,672 a Troy ounce, confirming movement from stocks to precious metals.  Seasonal selling also contributes to Wall Street’s sour mood.

             Obama can expect little help from the Republican-led House.  GOP presidential nominee former Massachusetts Gov. Mitt Romney hopes for bad news before the election.  Any sign of good economic news helps Obama’s chances of reelection.  With Bush’s tax cuts set to expire for all income brackets at year’s end, there’s growing concern about the so-called “fiscal cliff.”  Obama has been reluctant to approve a continuation of the Bush tax cuts on taxpayers earning over $250,000 a year.  If Obama agrees to extend all tax cuts, he may get the GOP-dominated House to go ahead.  If not, he faces the prospects of a recession in 2013, but, more importantly for his reelection, a major sell-off before November. White House spokesman Jay Carney urged the House to extend Bush’s tax cuts on taxpayers earning less that $250,000 a year.  His requests fall of deaf ears.

             Barack has few options before the election other than placating the GOP-controlled House.  Faced with a 2013 recession and possible loss of 2 million jobs, Obama must continue the Bush tax cuts or risk losing the election.  Every time Wall Street sells off, he loses precious ground in swing states.  Holding the narrowest of leads now, Barck can’t afford to alienate any constituency.  Autoworkers put back to work in the Upper Midwest.are what’s left of Barack’s narrow lead.  Any downward pressure on Wall Street could tip the balance by Election Day.  Expecting any help from the Republican-dominated House is unrealistic.  “That would, in a single stroke, address a significant portion of the concern about the so-called fiscal cliff.  It would not entirely deal with it, but it would have a significant impact,” said Carney, knowing the White House finds itself at the House’s mercy.

             Getting Wall Street in the rally mode won’t be easy between now and the election.  With the bulls having run themselves out, the White House will have to do some fancy footwork to stave off a major sell-off.  House Republicans have the White House over the barrel.  Given ongoing problems in the Eurozone, the White House has no choice but to act urgently to end worries about the upcoming fiscal cliff.  Continuing he Bush tax cuts for all is the last short-term strategy to stave off the CBO’s prophecy of a 2013 recession.  Without striking a deal now with House Speaker John Boehner (R-Ohio), Obama faces growing prospects of a Wall Street sell-off before November.  “It’s just a reminder that at the worldwide economy continues to disappoint,” said Detrick, reflecting on slow growth in China and the Eurozone.  Without taking bold action, the White House faces stiff headwinds in November.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.

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