By: Kevin Flynn
March 17, 2014
The Federal Reserve gets a lot of credit for what passes as an economic recovery. Whether it deserves that credit, going forward the Fed has very little power to influence events because it is essentially out of ammo to further ease. The economy, meanwhile, is still lackluster, despite the central bank’s unjustified optimism.
The Fed cast a warm and fuzzy glow in January, when it predicted a pickup in economic growth, which it cited as its rationale for tapering its bond buying campaign, called quantitative easing (QE). And if that acceleration doesn’t happen in the near future?
Don’t worry: Wall Street will just shift its predictions for a growth resurgence to the second half of the year, as it’s done every year since about 2005 — if memory serves correctly. At this time of year, the Street always says that things will get better in the second half.
The revision of fourth-quarter 2013 gross domestic product growth of 2.8% is not enough of a reason to reverse the Fed’s QE policy, which seems to have less and less effect on the real economy, according to the central bank’s own research. The Fed says it will gradually taper its monthly bond buying, most likely ending it altogether late in the year. But the Fed’s new chief, Janet Yellen, adds that it reserves the right to change course and increase the purchases if the economy dips.
If the current first quarter does end up with say, 1.5% GDP growth, the bad weather in much of the nation will be a factor. But the weather effect is still amorphous enough not to reverse course. Once winter fades, there will inevitably be a rebound effect, so the bank may have to wait until the third quarter before it feels comfortable saying anything about the true core rate of growth (although it probably will cut its 2014 forecast by the June meeting).
Keep in mind that the only easing tools the Fed has left are forward guidance – its practice, through issuing forecasts of its policy intentions, of influencing market behavior – and more QE. It can’t run about ramping up money printing for every bump in the road. Its bond purchases succeeded in raising asset prices by progressively upping the ante each time; that option isn’t available anymore, not when the price tag is the Fed’s bloated balance sheet already on its way to $5 trillion. Also, 2014 is a mid-term election year, and I suspect that the Fed governors would really like to be out of the program entirely come November.
Finally, as dovish as Yellen and the others may want to be, there are a couple of realities confronting the bank. One is the lack of ammunition for any crisis that might pop up before the current QE program is back to zero again. QE is partly a psychological effect, and backing out of tapering it in mid-stream is likely to induce considerable anxiety after the initial euphoria wears off.
The other is the nature of the Fed’s charter. Quantitative easing was predicated from the beginning on improving employment, a goal handed to the bank in the 1970s by the Humphrey-Hawkins Act. The unemployment rate, now 6.6%, is unlikely to rise anytime soon, given that unemployment is a lagging indicator. So far as the business cycle goes, it is one of the last parts to decline. A resumption of QE after a weak GDP report and a Fed prediction that unemployment might worsen would be politically lethal – the central bank is only as independent as Congress says it is.
The economy hasn’t shown any signs whatsoever of accelerating to a sustained 3% growth rate. The recovery from the Great Recession has been choppy, with one quarter’s surge followed by a weaker performance. Fourth-quarter 2012 growth slipped to a mere 0.1%, for example. Temporary growth surges sometimes occur, due to sporadic influences like the inventory-restocking episode from last year, when this sudden and unexpected increase helped propel the third-quarter gain to 4.1%.
I couldn’t believe my ears on Thursday when I saw a fellow on CNBC say with a straight face “well, the economy really is getting better this year.” The economy is only getting better on the same basis it’s gotten better the last five years – somewhere over the rainbow.
The current stock market rebound is getting stretched: The Standard & Poor’s 500 has nearly reclaimed its January peak, while the Nasdaq is making new post-2000 highs. All of that in spite of some pretty weak data recently, such as the housing sector’s downbeat results. The National Association of Realtors says January existing home sales slumped 5.1%, which it ascribed to poor weather, and rising home prices and mortgage rates.
That said, equities could still squeak out mild gains ahead, after a breather here and there. I’ve talked about a first-quarter top for stocks since the beginning of the year, and my prediction is still intact. But it still appears to me to be a top to sell, not to buy.
Gold Goliath is not your typical gold dealer.