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Fed Action Is Positive for Markets: Trennert

Wednesday, 11 Aug 2010 | 10:33 AM ET

Tuesday’s policy statement by the Federal Reserve was positive, in spite of the immediate market downturn, Jason Trennert, chief investment strategist of Strategas Research, told CNBC Wednesday.

“I think the stock market may be interpreting this the wrong way,” said Trennert. “I view it as quite positive because the size of the balance sheet is at least going to remain unchanged. I don’t think you’re going to have more quantitative easing any time soon.”

He said that Fed Chairman Ben Bernanke also left the door open for the Fed to add to the balance sheet, should the recovery falter and the central bank thinks it’s necessary to take further action.

In downgrading its economic outlook on Tuesday, the Fed said it would reinvest "principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities...and continue to roll over the Federal Reserve's holdings of Treasury securities as they mature."

Mountain of Economic Worry
The Fed downgraded its economic outlook in its latest statement. Jim O'Sullivan, of MF Global; Jason Trennert, of Strategas Research; and Richard Bernstein, of Richard Bernstein Advisors; share their reactions.

The Fed’s balance sheet is currently made up of about 30 percent in Treasurys and the rest in mortgage-backed securities, said Trennert, as opposed to how it was at the height of the financial crisis in 2008 when 90 percent was in Treasurys.

Trennert added that the Fed’s action subtly puts more pressure on the administration to come up with a solution for the troubled housing market. “I think in the next couple of weeks, you may see another initiative on the fiscal side to support housing because this rolling the debt over from agencies into Treasurys at the margin puts more pressure on the Obama administration.”

Jim O’Sullivan, chief economist at MF Global, said the Fed’s statement was an acknowledgement that the recovery has slowed, but he added: “They aren’t giving up on the recovery. If it’s not just a near-term slowing, they will come back and do a lot more. What they did yesterday was very small and token.”

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