What Investors Need to Hear From Bernanke
Investors are hungry for good news from today's Federal Open Market Committee meeting. Here's what Ben Bernanke can — and can't — deliver.
Who knew a routine FOMC meeting would turn into a major event? Market routs have a way of changing things, and now everyone wants to know if Fed Chairman Bernanke can stop the insanity.
There is even some chatter that the Fed could announce another round of monetary easing, which helped lift stock futures.
But can Bernanke really pull off another round of easing in the current political climate? Strategists such as Rebecca Patterson, chief markets strategist for J.P. Morgan Asset Management, Institutional, don't see it.
"We expect that today’s Fed meeting will see the statement language adjusted to reflect the softer market and macro backdrop, as well as suggest that the Fed will do what’s needed to keep meeting its dual jobs/inflation mandate," Patterson told me.
That would be nice—but whether it would change things is another matter.
"At the margin, central bank efforts like this should help sentiment," Patterson said. "But it’s not clear to me if these small steps will be enough to turn the larger cyclical sell-off we’ve seen in recent days." Patterson recommends staying on the sidelines for now until after Bernanke's comments, given the level of uncertainty in the markets.
It's not even clear that the Fed has the ability to do much, according to Camilla Sutton, chief currency strategist at Scotia Capital.
"Markets are undergoing a crisis of confidence built on investor realization that the solution is not an easy one and that there is likely little the Fed can do to stem losses," she wrote in a note to clients.
Sutton sees four possible actions by the Fed:
—Another round of easing, which she believes is highly unlikely.
—Changing the wording of the official statement to specify how long the Fed intends to keep rates low, which Sutton said "would do absolutely nothing to stabilize confidence."
—Reducing the interest the Fed pays banks for what they hold as reserves, which she thinks would also be ineffective.
—Trying to lower long-term interest rates without raising short-term rates. "We see little value in such a strategy in the current environment as the problem isn’t rising long-term yields or flows into the [U.S. dollar] but instead a collapse in confidence," Sutton said.
Given her limited expectations for the Fed's ability to shift sentiment, Sutton says it's too early to predict a top in the dollar and she also expects continued strength in the safe-haven Swiss franc and Japanese yen. Riskier currencies such as the Australian , New Zealand and Canadian dollar as well as the Swedish krona could suffer, Sutton said.
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