Farrell: Can Bernanke Do Anything to Surprise the Market?
Chairman Ben Bernanke changed this weeks Federal Reserve meeting from one day to two. He has to have a good reason, right? He said there is a lot to discuss, but there usually is. These guys are not without ego and want their say, and the Chair wants more time.
I fear the market is expecting more news, or more good news, than the Fed could possibly deliver.
As it is Monday morning and the market is off sharply, it brings into closer focus that we could be disappointed and the market could suffer. The market is down right now, say the guys on TV, because of the mess in Europe and the inability to arrive at a coherent plan on how to deal with Greece. In fact, there is no plan, coherent or not. Also, Chancellor Merkel's party lost what I read was the sixth consecutive local election. She is suffering politicallyand it is becoming increasingly more difficult for her to defend her euro stance against growing internal opposition.
I also don't think the tax plan President Obamais to present this morning is sitting well. $1.5 trillion in new taxes on the rich has no way of getting enacted. Agree or disagree that new taxes are needed, this program is DOA. It might be a logical and rational (from the Democratic Party standpoint) political move prior to an election. Isolate the tax issue and make the Republicans seem to be obstructionist and unfeeling. It might work, but his call to tax the millionaires and billionaires and jet setters has not fallen on receptive ears. Or the ears might be receptive, but the brains behind the ears have bigger worries not being addressed. Or not being solved anyway.
So can Ben do anything significant to push the pile forward or to surprise the market?
Our head of sales and trading, Dante Ferrarie, yet another of my bosses, asked me to think it through. Rather than doing that (thinking and Monday, Can't help that day, don't mix), I read everything I could and here's what the world seems to think are possible surprises.
Ben could start to twist, sell shorter dated bonds and buy longer dated, to keep/drive long rates down. But rates are already down and there is a lack of loan demand for a bunch of reasons we have talked about. He could stop paying the 25 basis points on excess reserves commercial banks have on deposit at the Fed to encourage them to lend it. Or he could use the old "moral suasion" formula to try to talk his way out of the situation. We know that won't work. [As an aside, and appropo of nothing, the concept of "moral obligation" was mentioned this morning in regards to municipal bonds. My contribution to the discussion was to remember that moral obligation bonds were devised by John Mitchell when he was at Mudge, Ross, Guthrie and Alexander. Later to be Nixon, Mudge Rose etc. Mitchell became Nixon's Attorney General, had one piece of work named Martha for a wife, and wound up in Watergate related jail. No one in the room had any idea of what I was talking about.]
Jon Hilsenrath, the Wall Street Journal's ace reporter and very good guy, wrote this morning that the Fed is examining whether to adopt specific numerical targets. He mentioned a Fed director had suggested that rates not go up until unemployment fell to, say, 7.5%. Ben the Beneficent commissioned Plosser, Evans and Yellen, the Three Amigos, to study such a plan. An announcement Wednesday is unlikely. But a surprise announcement like this would rally the market (my opinion).
Don't count on an announcement, though.
Other radical things the Fed could do (and I cribbed this from any number of sources. There is not a single original idea from Farrell) would be to buy foreign bonds to bail out Europe and weaken the dollar (not a chance); target a level for the ten year bond (say 1.5%, but that would fall under the heading of targeting an unemployment rate, and is not likely - yet); or offer fixed term loans to banks and accept all sorts of crap as collateral. Or, he could launch a full-throated QE3 and buy another $gazillion bonds without selling anything to offset the expansion of the balance sheet.
He would just have to avoid Texas and The Rick Perry Texas Hold-em (by the neck) Posse for a little while. My best guess- no big news at all, and a continuation of the trading range we have been in with 1120 the low end and 1240 the high.
Vincent Farrell, Jr. is chief investment officer at Ticonderoga Securities and a regular contributor to CNBC.