Five Ways More Fed Easing Could Make Things Worse

Federal Reserve Chairman Ben Bernanke took another step toward signaling further monetary stimulus Friday, but in doing so left one key issue unanswered: What if all this intervention causes more harm than good?

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Results for the central bank's liquidity program—commonly referred to as quantitative easing—have been mixed at best so far. Unemployment remains high, the housing market hasn't recovered and consumer confidence is still low.

So the notion that printing another half-trillion-dollars or more might not make a difference is something that's keeping some market pros up at night.

"We haven't seen much bang for the prior buck from all of the stimulus that they gave us through the first half of the year," says Kim Rupert, managing director of global fixed income analysis for Action Economics in San Francisco. "I'm not so sure that we're going to see any rapid improvement on this round, either."

Jeff Cox
Senior Writer
CNBC.com

Worries about all the things that can go wrong with more Fed easing can be broken into five categories:

1. Too Much Intervention

Many strategists and analysts would be just as happy to see Bernanke and his Fed cohorts butt out and let the market find a normalization level on its own.

Currency manipulation and hand-holding of the stock market can't last forever, and the time is going to come eventually where the Fed will have to cut itself loose.

Treasury yields have fallen more than a quarter of a point since the Fed indicated in mid-September that it would move if necessary to bolster growth.

"We have the biggest player on the block, the Fed, with an infinite amount of buying power keeping rates extremely low. It just prevents the normal workings of the market," Rupert says. "The Fed is deciding who is going to be the winner and who is going to be the loser in this game."

2. Too Little Intervention

And there's the flipside of the argument: If the Fed does decide to launch another easing program, the risk is that it makes no one happy by intervening too little to make a difference.

Analysts have long questioned the size of the interventions, reasoning that a $500 billion boost might only move gross domestic product by a quarter point or so.

Should the Fed fall short, the October rally may reverse itself as the market has priced in the expected level of QE and may revolt at anything less.

"Overall, the Chairman's speech contained more dithering than we had hoped," Zach Pandl, economist at Nomura Securities in New York, wrote in a note to clients. "This means Bernanke truly sees high risks to further easing (where we do not), or indicates a greater division of views on the committee."