The Republican Party is using the Federal Reserve as a piñata in Tampa this week, criticizing its policies, but Wall Street just wants another dose of easing.
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Bernanke at Jackson Hole in 2010 when he hinted about QE2
There are a few economic releases traders will be eyeing Wednesday, but the main topic will once more be the Fed’s symposium in Jackson Hole and the speech Fed chairman Ben Bernanke will give there Friday. Wednesday’s data includes pending home sales at 10 a.m. ET and the second look at second quarter GDP, at 8:30 a.m. The biggest release of the day comes at 2 p.m., when the Fed puts out its beige book on the economy, which is sure to be picked over for any discussion of employment.
The latest criticism of the Fed came from Sen. Bob Corker, R-Tenn., who repeated his concerns about the Fed’s dual role Tuesday and criticized its use of monetary policy in a Financial Times op-ed piece. The Fed’s mandate requires it to pursue policies of maximum employment and price stability. Corker also said he sees no reason for further quantitative easing, and said markets are too dependent on it. He called on Bernanke to act “with a greater sense of humility” about the limits of what the Fed can do.
“Investors at this point, in my opinion, are way over-reliant on what the Fed is going to do,” Corker said later, in an interview on CNBC’s “Fast Money.” Corker did praise Bernanke’s handling of the financial crisis, but now he’s a “distraction.”
“At this moment, I believe the Fed has become a distraction, and I believe we as a nation should go in and address the big issues of the day,” he said.
Republican presidential candidate Mitt Romney has supported an audit of the Fed, and he and running mate Rep. Paul Ryan, (R-Wis.) both say they see no need for more easing. Romney also has stressed he doesn’t want to hurt the Fed’s independence.
Corker’s comments should find a welcome audience at the GOP convention, underway this week in Tampa. A Bloomberg news survey of 158 delegates from 10 battleground states show that a majority – 64 percent - rated the Fed’s performance as poor and another 30 percent said it was no better than average. On Fed independence, 63 percent said it was a bad thing, since the central bank is unaccountable.
Corker also said in his editorial that Bernanke is “comfortable” with managing long term rates and unwilling to say there are limits. However, Bernanke has repeatedly called on Congress to address fiscal matters because of the inability of the Fed to fix the economy on its own. He said Romney, if victorious, would not reappoint Bernanke when his term ends in 2014, nor would Bernanke want to stay.
“Everybody sees that as blatant politics and nobody cares,” said one Treasury desk trader of the Corker op-ed.
Art Cashin, director of NYSE floor operations at UBS, said he expects to hear more about the Fed from Tampa. “I think they will be railed at to some degree at the convention, not by Romney, but by others,” said Cashin. He said Bernanke is not going to say much in his speech. The Fed chairman has said the Fed could do more easing, if it needs to, and that it would also weigh the costs.
Fed watchers expect the Fed to extend the timing for keeping rates ultra-low into 2015 from late 2014. They are less sure on QE, but many believe it will happen before the end of the year, and the Fed could purchase mortgage securities in addition to Treasurys in its third quantitative easing program.
Cashin said a big topic of discussion Wednesday may be more about why European Central Bank president Mario Draghi backed out of the Fed symposium Tuesday. He was to speak as part of a panel on Saturday. “I think trying to sort out Draghi may consume a lot of the time in Europe tomorrow,” he said.
As for Bernanke, “the market’s going to sort it out. He’s not going to offer them a magic lantern. He’s going to bring a menu and not offer a direction,” said Cashin. He said the elevated stock market, close to four-year highs, makes it more difficult for the Fed to ease, and critics of QE say it is hard to see what return more easing could do for the economy, at this point.
While few on Wall Street really expect to see Bernanke tip the Fed’s hand on whether another round of quantitative easing is in the offing, they acknowledge there is a sense in the market that that could happen.
One reason is that Bernanke hinted at quantitative easing at the 2010 Jackson Hole symposium. But Bob Sinche, head of global currency strategy at RBS, said Bernanke does not want the market to anticipate policy comments from Jackson Hole.
He said the Jackson Hole symposium is not meant to be a forum for that but it was in 2010 because the Fed needed to show it was responding to deteriorating conditions. Sinche said the Fed had been discussing an exit strategy from its easy policies earlier that summer. “Six weeks later, the equity market tanked. The feeling was they had to signal something quickly and that was the next opportunity to do it,” he said.
Now, he said the Fed, like much else, has gotten caught up in election politics.
“Obviously, this is an election year. The politics are going to play big in everything,” said Sinche. “I think the Fed is saying: ‘We’re beyond that. The economy is still in a difficult, strained position and we need to do what we need to do.’”
“For someone in the political realm to be criticizing monetary policy is pretty interesting at this juncture. We’re four months from the fiscal cliff,” said Sinche. The so-called “fiscal cliff” is the dual expiration of Bush-era tax cuts at year end, and the automatic implementation of spending cuts that will take place, starting Jan. 1 if Congress does not act. Congress has basically put off addressing the fiscal cliff issues until after the November election.
What Else to Watch
Energy markets will be watching the track of Hurricane Isaac to see if the refining industry will be able to move quickly to restart the six refineries shut down ahead of the storm. Gasoline futures eased Tuesday, losing 0.9 percent to $3.1261, after gaining sharply Monday.
“The cash market settled down to Friday’s levels,” said Andrew Lipow, president of Lipow Oil Associates. “We’ll see what happens on the other side of the storm. We’ll see if flooding is, or is not, going to be an issue. We have four refineries planning to run through the storm.”
Nymex crude gained 0.9 percent to $96.33 per barrel Tuesday.
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