None other than Meredith Whitney, the top rated bank analyst on Wall Street, characterized the Federal Reserve’s quantitative easing program to purchase mortgage-backed securities (MBS) as a ‘deal with the devil.’ Can the Federal Reserve sneak out of hell without disturbing the other residents? Can the Federal Reserve regain its stature of credibility and independence in the face of such massive government intervention and Wall Street influence? The challenge embedded in communicating how the Fed will ‘exit hell’ will be the single greatest determinant of economic and market direction over the next six months.
Did we catch a peek into those depths of hell yesterday given the release of the most recent Federal Reserve policy statement?
What did we learn?
Same news, different day.
1. The Federal Reserve plans to keep rates exceptionally low for an extended period.
2. Economy likely to be weak for a time.
3. Inflation likely to remain subdued as resource slack (low capacity utilization rate) continues to dampen cost pressures. (LD’s comment: I think the Fed remains more concerned with deflation currently given pressures within the job market and residential and commercial real estate markets. They just don’t dare say it).
4. Quantitative easing remains on track to be completed at end of first quarter 2010. The Fed’s purchases of agency debt is lessened from $200 billion to $175 billion. I do not view that development as truly significant.
With this statement, the dichotomy between Wall Street and Main Street continues.
How and when will the wizards in Washington figure out how to relieve pressures on Main Street? The ongoing policy of providing cheap and easy money to a handful of banking institutions to lend to their hedge fund friends and assorted other trading counterparties is doing little to nothing for those in Main Street. If the elections last evening indicated anything they sent a strong clear signal of disgust with Washington’s politics as usual.
The problem Ben Bernanke, Tim Geithner, Larry Sumers, and ultimately Barack Obama face is having gotten into this deal with the Wall Street devil, how do they get out?