Yesterday, at a meeting of fellow financial advisers, I was asked if the Fed would end the current quantitative easing program and begin a new one. I replied they should ask me at 8:31 AM this Friday, which is immediately after the monthly "jobs report." This is easily the most important economic report each month to the Fed, and the report this Friday would be the last one before the Fed makes a decision. If job creation falters, the Fed will have to institute some additional effort, and will be called QE3.
Today, the economic data was so bad that it is clear the economy has stalled. The forecast for job creation this Friday immediately dropped from 190,000 to only 120,000. Since one of the Fed's two mandates is full employment, they cannot ignore this. It is clear to me that the Fed will have to do something. It may not be quantitative easing, which is nothing more than the Fed buying the bonds from Treasury to keep interest rates down. Without that, interest rates would rise, and every Keynesian economist knows the Phillip's Curve, which shows graphically that higher interest rates produce higher unemployment.
QE2 expires at the end of June, but the Fed may extend it. Or, they may do nothing until later in July. Or, they may do something entirely different. But, the Fed is not leaving the field. With a useless Congress, they are the only defense the economy has.
With ugly economic news, it was not surprising the stock market was also ugly today. The Dow lost 280 points, the worst day this year. Of course, it didn't help that Moody's simultaneously downgraded Greek bonds from junk to miserable junk, which made things worse. Part of the drop today was factoring in a default of those bonds, which means the market shouldn't react as badly when the default actually occurs. This was a direct insult to all the European leaders who have assured us there would be no default.
One analyst asked how long the Fed can keep "the pedal to the metal?" I'm confident Bernanke, an expert on the Great Depression, would say "as long as it takes, even if it means QE4, QE5 . . ."
