By Sasha Cekerevac for Investment Contrarians | Sep 26, 2013
It had been a long time since the Federal Reserve really surprised the markets. That is, before last week’s announcement that the central bank was going to keep its foot on the gas pedal—with the “pedal to the metal,” as the saying goes—leaving monetary stimulus in place.
As you probably know, at the last Federal Open Market Committee (FOMC) meeting, the Federal Reserve announced it would continue buying mortgage-backed securities worth $85.0 billion each month for the foreseeable future. Everyone was expecting some reduction in monetary stimulus; to have no change at all was quite a surprise.
But while the markets celebrated the news with new record highs, the fact that the Federal Reserve feels the need to continue pumping monetary stimulus into the economy actually worries me. Even with the stock markets near their highs, the bank’s interpretation of the current economic situation is certainly not as optimistic as many would’ve believed.
We have seen some data over the past couple months that indicate the pace of job hiring in the U.S. economy is starting to decelerate. At this point, the trend should have been for jobs growth to begin exceeding 200,000 per month. But while the level of job creation is still positive, it’s nowhere near the 200,000 mark, which is a concern.
The Federal Reserve is also worried about the continued drop in the participation rate. A person leaving the workforce is not a sign of economic strength. This is one reason that the Federal Reserve is continuing the monetary stimulus program, to continue enticing companies to expand and hire.
The problem, as I’ve stated in these pages many times before, is the fiscal side and not the monetary stimulus part of the equation. The fiscal part of an economy is the federal government, and what we are now witnessing with the budget debate is that politicians in Washington are willing to play games with the economy and people’s livelihoods.
With a host of new rules and regulations that could come down the pipeline, such as the new healthcare legislation, and the uncertainty regarding yet another sequestration with the ongoing budget debate, the effect—a leaderless federal government—means increased uncertainty for businesses nationwide.
Over the last couple of years, while monetary stimulus has helped certain sectors that are interest rate-sensitive, such as housing and vehicle sales, it is not a policy that can work everywhere. The Federal Reserve is extremely limited in its capabilities to help the economy. When it comes to taxes, regulations, and structural reforms, these are all part of the federal government.
What should an investor do at this point?