Even beyond its cruise-ship association, shuffleboard seems to offer an apt analogy for what the Federal Reserve is about to try: shoving risk-averse investment capital into the risk-bearing field of play.
The problem is that an effort of any force is likely to send much of the freed-up capital out of bounds. Instead of going to work in the American economy, many of these extra dollars are likely to add fuel to asset prices in emerging markets and inflate the prices of commodities seen as a hedge against a falling dollar.
In fact, that’s been happening in advance of the Fed’s expected Nov. 3 announcement of further Treasury purchases.
Even extra dollars that serve to push up U.S. equity prices may miss the mark. Inflated paper wealth may not do much to loose the purse strings of consumers uncertain whether the economic boost from the Fed’s second round of quantitative easing will be more sustainable than its first try.
By using its printing press to bid up and sop up an expected $1 trillion or more worth of Treasuries, the Fed plan is to shuffle the risk-profile of investment portfolios. With government bond yields artificially depressed, more risky investments such as equities look attractive in comparison.
Although Fed Chairman Ben Bernanke has been virtually silent about it, everyone on Wall Street understands that his objective is to push the stock market higher, so it’s not surprising that equities have been on a tear – at least until Tuesday.
In a rare note of candor for a central bank official, Brian Sack, head of the markets group at the New York Fed, said earlier this month that quantitative easing “adds to household wealth by keeping asset prices higher than they otherwise would be.”
The context of Sack’s remarks was an acknowledgment that lower Treasury yields due to Fed purchases may have a limited impact on the economy “because of the credit constraints facing some households and businesses.”
Among households, for example, both those with subprime credit and those with insufficient equity in their homes will have a hard time taking advantage of lower interest rates, limiting any boost in consumption from refinancing.
In short, the Fed has very little ability to direct its monetary stimulus, and the harder it pushes, the more capital that will overshoot with such potential unintended consequences as higher oil prices and emerging market bubbles.
In reality, it seems that almost no one across the political spectrum believes that aggressive Fed quantitative easing is the right policy for the economy. Either they think the limited rewards don’t justify the risks, or they see fiscal policy as better targeted toward job creation, with monetary policy in a complementary role.
That apparently includes the Fed’s recently departed vice chairman and key Bernanke adviser Donald Kohn.
“This is kind of a textbook situation in which you would want some fiscal push to the economy,” Kohn said in a speech on Friday.
But with fiscal policy seemingly off the table, Bernanke sees little choice but to use his shuffleboard stick.
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