The Guest Blog

Farrell: Fed Is Out of Bullets

"Hey Ben, Doing Anything?"

"No, not a thing I have used all my ammo and all I can do is hang around for a bit."

"But Ben," said I, "there is enormous distrust of both the political system and the allegedly independent ratings firms that are tasked with the job of telling us how credit worthy things are. These guys at S&P made a $2 trillion error and downgraded the US the same afternoon. That's after they kept AAA ratings on mortgage thingies that defaulted to the max. The US won't default so is it the raters job to assess the ability of Washington to function?"

Ben sadly turned away like that young guy in the Bible.

Bernanke Testifies to Congress on U.S. Monetary Policy

Ben cut interest rates to zero, devised a zillion bowls of "alphabet soup" rescue programs as the Wall Street Journal put it, and bought every bond put out for bid and ballooned the Fed's balance sheet by trillions. Maybe it saved us from disaster, but we haven't seen the growth expected.

The Q's resulted in a .8% GDP growth rate for the first half of this year so it is unlikely another QE program will be launched. Many are calling for it, but I don't get the rationale. There is still over a $trillion on deposit with the Fed from the first Q.

One option would be to stop paying interest on those deposits and "encourage" the banks to lend the money. OK, but there has to be loan demand as well. Large companies have lots of cash and precious little confidence.

The Fed could extend the "extended period" but that might be more linguistic gymnastics than anything else. They could promise not to sell what they have or plan to extend the average maturity to keep long rates low. But long rate are low.

The Fed is out of bullets and the next step, if there is a next step, is fiscal policy from Washington. Great!

Vincent Farrell, Jr. is chief investment officer at Ticonderoga Securities and a regular contributor to CNBC.