It has been a tough couple of weeks, at best, for Dr. Bernanke and his colleagues at the Federal Reserve, since they’ve been under nearly unrelenting attack since their announcement of “QE2,” the new $600 billion of bond purchases by the Fed.
First it was the Chinese and Germans at the recent G20 meeting in Seoul and then, more recently, they have taken flak from economists and politicians alike.
Sarah Palin led the political parade by issuing a “cease and desist” order while a raft of prominent Republicans including Newt Gingrich and Ron Paul joined in criticizing the Fed’s recently implemented plans.
Beyond that, a group of 23 well known economists including Michael J. Boskin, (Former Chairman, President’s Council of Economic Advisors for George H.W. Bush,) John F. Cogan, (Former Associate Director, U.S. Office of Management and Budget in the Reagan Administration,( and Douglas Holtz-Eakin, (former Director of the Congressional Budget Office,) wrote an open letter in the Wall Street Journal in which they said, “We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.”
And finally, two prominent Republicans, Senator Bob Corker and Representative Mike Pence, said that they were introducing legislation to force the Fed to focus solely on inflation and drop its dual mandate of promoting inflation within target levels and full employment. Pence said that the Fed policy has “failed” and that the Fed should focus on keeping inflation low and preserving the value of the dollar.
I’m sure that all of this criticism was not expected as so far the Fed has enjoyed relatively easy sailing and has been seen as the architect of global recovery and the savior of the Western World.
I’m also sure that the Fed isn’t too concerned about all of this verbal criticism as it is an independent entity; however, there is one more voice of criticism that I’m sure is much more worrisome to Chairman Bernanke and his colleagues, and that is the voice of “Mr. Market.”
And Mr. Market isn’t happy as global equities markets have completed seven out of eight days of declines which is the longest losing streak since January, commodity prices have plummeted in recent days, the dollar has rallied and Treasuries have been selling off.
These are exactly the opposite results from those expected or desired as “QE2” was designed to increase the “wealth effect” of a rising stock market and to lower interest rates.
Now of course, the declines of recent days aren’t solely due to market dissatisfaction with “QE2” as we’ve had a blizzard of troubling news out of Europe surrounding Ireland, Greece and Portugal and worries about rising inflation in China that has caused their markets to plummet.
However, it is troubling that with QE2 engaged and the Permanent Open Market Operations in progress nearly everyday, that the markets have ignored this unprecedented liquidity and the “Bernanke Put.”
In recent days, we’ve seen the recent rise of the U.S. dollar which has been moving inversely to the S&P 500 and the sharp sell off in the Shanghai Composite which is often viewed by analysts as a leading indicator for other major global markets.
“QE2” is designed to put a floor under asset prices and has the corollary effect of weakening the U.S. dollar. These charts would indicate that either quantitative easing could have lost its effect or could be backfiring as markets lose confidence in the Fed’s ability to promote the fragile recovery.
While one can never underestimate the power of the printing press, one must ask the obvious question, “If the Fed and their printing presses can’t keep this market afloat, what can?