Should the Fed Buy Stocks to Boost the Markets?

Ben BernankeWhen Fed Chairman Ben Bernanke convenes the annual summer retreat of global central bankers and economists in Jackson Hole, Wyoming on Friday, he'll have a lot more on his mind than the breathtaking scenery. The economy has proved to be a bigger headache than anyone imagined, and the Fed doesn't seem to have a ready answer about what to do next.

"The Fed is largely out of bullets," says Joel Naroff, president of Holland, Penn.-based Naroff Economic Advisors.

Not so, says Roger E.A. Farmer, chairman of the economics department at the University of California at Los Angeles, who is the author of a new book on the financial crisis called, How the Economy Works. Farmer says the Fed's interest-rate setting Open Market Committee erred two weeks ago when it announced that it would maintain its bond portfolio at current levels instead of buying more securities -- a process known as quantitative easing that is designed to stimulate the economy.

"I don't think the Fed delivered a particularly positive message. I think the half-hearted attempt to continue with the current bond portfolio without increasing quantitative easing is disturbing," Farmer says.

Farmer would like the Fed to be "intervening in a big way in the asset markets," and he makes the novel suggestion that this include Fed purchases in the stock market, as a way to stabilize asset prices. While he acknowledges that is probably not politically feasible in the current political climate, Farmer would still like to see the Fed substantially expand its purchases of Treasury bonds.

Uncertainty Rules

In fact, the Fed's decision to maintain its bond portfolio at the current size, rather than allow it to shrink, did appear to affect bond prices. Interest rates have fallen to historic lows since the Fed meeting, which means investors benefited -- bond prices rise when interest rates decline. But stocks have fallen about 6% since the FOMC met.

"There is a huge amount of uncertainty out there about what is going to happen to stock prices in the future," Farmer says. Because huge amounts of capital are waiting on the sidelines to see what will happen, asset prices, house prices and real estate prices will continue to fall, he says.

Housing is one of Bernanke's biggest headaches. Existing home sales plummeted by 27% in July, while housing inventory increased from 8.9 months to 12.5 months. New home sales also plunged to the lowest level on record.

"The problem is that housing typically leads the economy out of a recession," says Naroff. "In this economy it's not going to do that. It's another factor that argues we're going to have a slow recovery."

Naroff says he still believes the country will escape a double-dip recession. But Farmer thinks that fate remains a distinct possibility, and David H. Resler, chief economist at Nomura Securities International, says he has raised the chances of a double-dip from one in four to four in ten in just the past two days.

"When you're at low rates of growth, it doesn't take much to tip the scales to negative," Resler says.

Resler anticipates the Commerce Department will announce on Friday that GDP growth in the second quarter was just 1.6%, down from 3.7% in the first quarter. Goldman Sachs is even more pessimistic, predicting only 1.1% GDP growth will be reported for Q1. Only a month ago, Bernanke told Congress that most members of the FOMC expect 3-3.5% growth in 2010 and 3.5-4.5% growth next year.

Fed Holding Steady, but Under Pressure

At its meeting on Aug. 10, the FOMC acknowledged that the pace of recovery "has slowed in recent months." It announced that it will keep constant the Fed's holdings of government securities at the current level, which is a whopping $2.3 trillion, three times greater than in 2008. As the mortgage-backed securities it owns mature, they will be rolled over into Treasuries.

As a sign of the difficulty Bernanke now faces in setting policy, The Wall Street Journal reported earlier this week that seven of the 17 voting members of the Fed committee had opposed keeping the Fed's portfolio of securities at its current size. Some conservatives on the FOMC wanted to reduce the size of the portfolio to avoid concern about stoking inflation, while liberals wanted more purchases to stimulate the economy.

"I suspect Bernanke is a lot more sympathetic to an expansionary view than a lot of other people on the committee," Farmer says. The Fed chairman can try to convince doubters of the wisdom of his views, but he is not a dictator, he adds.

Bernanke may have more headaches ahead. Resler says it is likely that unemployment, now at 9.5%, is likely to start rising again later in the year.

That's partly because many long-term unemployed, who left the labor market officially when jobless benefits were ended in June, have come back into the market to collect benefits that have been reinstated by Congress. They still won't have a job, but they will now be counted as jobless, which will put more pressure on Bernanke and the Fed to take dramatic action.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum

244 Comments

Filter by:
robcolrom

EVERYONE DENOUNCE THEIR CITIZENSHIP, ILLEGALLY CROSS BORDER AND DEMAND EVERYTHING FREE.

September 15 2010 at 10:53 PM Report abuse rate up rate down Reply
robcolrom

Here's anotherone, since I'm venting: Why are the administrators of your 401 or other retirement accounts able to make millions on put options, short sales or whatever they made up today, to take OUR money, but you can't buy them with YOUR money in your account, you can basically freeze it or lose it. I had asked Prudential about takeing my money out, and her only reply was that I can't. No explinations or reasons when I could.

September 15 2010 at 10:27 PM Report abuse rate up rate down Reply
robcolrom

KEEP SPENDING BILLIONS FOR SPACE EXPLORATION, THERE HAS TO BE INTELIGENT LIFE UP THERE,,,,,,,,,,,,,,,,,,THERE'S NONE DOWN HERE.

September 15 2010 at 10:20 PM Report abuse rate up rate down Reply
robcolrom

Let the middle class pay for everything, raise taxes so seniors are forced out of their homes. Keep spending money for wars, so the unbidded contractors can rape the "middle class" by overcharging by BILLIONS, let the little guys pay for it. SENIORS, JUST MOVE TO THE MIDDLE EAST, LIVE IN A DIRT HOLE, AND LET SOME POOR IRAQI, AFGAN, OR IRANIAN HAVE YOUR HOUSE. This may stop the wars, and save billions. WHY DOES AN INMATE BEING RELEASED FROM PRISON, WHO IS DEEMED, SPECIAL NEEDS, GET SOCIAL SECURITY CHECKS WHEN HE IS OUT? Another example: I'm renting a house for $500.00 a month, I am approached by someone and told to get "SECTION EIGHT" approved. Next I tell them rent is $500 a month, and the government says NO!, we'll give you $800.00

September 15 2010 at 10:17 PM Report abuse rate up rate down Reply
tonykarmen

PS; I FORGOT ALL ANALYST UNDER LAW MUST BE HELD ACCOUNTABLE FOR NEGATIVE STATEMENTS THEY BASHED DANDRION PHARMA FOR THEIR OWN GREED 59 DOWN TO 30DOLLARS HOPE YOU ALL SUFFER SCUMBAGS

September 01 2010 at 11:46 AM Report abuse rate up rate down Reply
tonykarmen

GEORGE BUSH JR SAID THE SAME THING, IT INFURIOATED ME, WHY HERE WE GO. THE AVERAGE PERSON KNOWS KNOWS O ABOUT THIS MARKET PICTURE THIS . YOUR AT THE BEACH EATING CANDY CORN, POP CORN YOU TOSS THE BIRDS SOME CORN THEY FLY RIGHT DOWN OVER YOUR YOUR HEAD AND TAKE IT IN ,AS THEY DO THIS THEY HOVER LIKE A HELICOPTER AND **** ON YOU, YES ON YOUR HEAD SOOO DON'T FEED THE DIRTBALLS SAME FOR THE STOCK MARKET THOSE DIRTBALLS,VULTURES, ANALYST ARE RECOMMENDING STOCKS U BUY THEY TAKE DO NOT BUY PENNY STOCKS YOU WILL LOSE ALL YOUR MONEY THESE VULTURES SPEND MILLIONS TO MAKE TEN THOUSAND ON 1CENT PROFIT SEEK PROFESSIONAL ADVICE LISTEN TO RADIO TALK SHOW WITH XTREME CAUTION I HAVE LOST THOUSANDS I STOPPED TRADING IT'S THAT BAD I'M WAY AHEAD BUT IT COST THE STOCK MARKETIS AS CROOKED AS OUR GOV'T, DO NOT LISTEN TO RADIO HOST THAT THAT WANT TO SELL YOU STOCK, OR A PROGRAM THE'R VULTURES... A RECOVERY CAN ONLY COME BY LOWERING THE PRICE OF OIL, GASOLINE TO 40 $$$ A BARRELLTAKEN OFF THE STOCK MARKET AND ALLOCATED FAIRLY IT IS A NECCESSITY OF SURVIVAL GREED RUNS AND RUINED AMERICA . PS NO MOSQUE IN NEW YORK BUILD IT IN YOUR OWN COUNTRY ,TAKE THE PRES WITH U

September 01 2010 at 11:18 AM Report abuse rate up rate down Reply
hiddenlevers

Bernanke isn’t making the markets bounce today. It’s just a dead cat bounce. We closed below 10k on Dow and that is a psychological level. There is a support there, but not solid ground. Kind of like falling out of a window and landing on the main deck of the Titanic. If we get two consecutive closes below 10k on Dow, abandon ship. Here is a chart of S&P500 and Consumer Confidence over the past 5yrs: http://www.hiddenlevers.com/hl/u?aGdrsx Two things are obvious – 1. nothing travels in a straight line 2. Look out below. Economics Jai ho!

August 27 2010 at 3:33 PM Report abuse rate up rate down Reply
jefferykperkins

You have to be kidding. The Fed has no business buying equity stocks for any reason. If the fed wants to do something to stimulate the economy it should go into the market and start buying real estate at or above the amounts owed on it by LONG-TERM homeowners who got scrfewqed over by the stockmarket manipulation that occurred on its watch over the past eight years. The fed should re-sell it only at higher market prices in order to encourage real estate price stability and maybe even growth. The idea of bailing out those who put their money in equities is ludicrous. They took the risk, they got the benefit of Bush's tax cuts and now the govt thinks it should bail them out yet again? I voted for Obama. If he goes for this scam I will turn red. JKP

August 27 2010 at 1:17 PM Report abuse rate up rate down Reply
hollaifyouneedtoo

Give it a go and make the world a better place to live. Just gooogle CASH-TEACHER Click on the very first link and you are there!!! Then you will find the ways to cash in. Go to the PENNY STOCKS section to see things that the corporate fat cats don't want us to know. You want to see how the rich do it...GO THERE!

August 26 2010 at 11:14 PM Report abuse +1 rate up rate down Reply
pandorme

I think this administration, and the FED are out of re-ride tickets ,including Disney World !Soon China is going to want to get paid!!!!!

August 26 2010 at 8:40 PM Report abuse +1 rate up rate down Reply