Possible Implication Of Inaction Or Action By The Federal Reserve

For months now, Americans have been watching the economy slowly plug along, with no real growth or forward progression.  Unemployment is still at 8.3% and manufacturing is still sluggish.  Every hope and attempt to get us out of the “muck” has slowly fizzled.  Not to mention, world-wide concerns over Europe’s situation has fueled American distrust in the current economy.  Many have looked towards the Fed to see if chairman Ben Bernanke had any more tricks up his sleeve to help spur on the economy. Although another round of government bond-buying known as quantitative easing is being thrown around, most economists are pretty uncertain that it will have any major impact on helping the economy. In his recent meeting in Jackson Hole WY, Bernanke didn’t rule out QE3 as an option, but didn’t make any promises to get the ball rolling in the near future.  However, Americans are hoping for answers as to where the economy is headed over the next few months.

Following Are Possible Actions And Timing Of Intervention And QE3 By The Fed:

The Fed Announces QE3 Before November’s Elections

Many economists are expecting Bernanke to announce QE3 any day now.  If the Fed were to implement QE3 we could see an immediate increase in the stock markets.  The biggest problem with having QE3 prior to the elections is the political backlash it could cause.  Many are resisting QE3, especially more conservative politicians.  There is also a huge push led by Ron Paul to audit the Fed. The decision to ease before elections could be risky for Bernanke.  On the flip side, if Mitt Romney gets elected Bernanke’s power could either be limited or completely revoked if he loses his job.  Bernanke may choose to ease now while his position is still intact.

The Fed Chooses To Wait To Implement QE3 Until A Significant Slow Down Occurs

Even Bernanke has admitted that Quantitative Easing poses risks to the economy that can not be predicted or measures.  Even though it may offer an immediate economic “booster” the long term inflationary complications could be devastating.  That being said, the Fed may choose to wait until something significant triggers the need for QE3.  The problem with waiting is that if the Fed waits until the economy is in a severely crippled state, it may be to late for the easing to work to help the economy.  There is a fine balance of not implementing QE3 when the markets are doing well, but also not waiting until they are doing so poorly that QE3 becomes ineffective. As a Seeking Alpha article states: “You should never catch a falling knife”  In other words, don’t wait until the stock markets are falling to start easing.  Better to catch them before they start their downward spiral.

The Fed Waits Until After November To Announce QE3

The Fed could wait until after elections to choose their course of action.  This strategy would allow more time to pass to truly ascertain if easing is necessary or helpful.  It would also would prevent any interference with the elections, which could actually hurt Obama’s chances.  The risks associated with waiting, is if Romney wins the elections QE3 may never happen.

The Fed Chooses Not To Employ QE3

The Fed may choose to avoid QE3 completely.  There are many risks with QE that could have a harmful long-term effect on the economy.  The Fed may instead choose to utilize a different method to bolster the economy.  However, this too has its downsides, because investors have been anticipating QE3 for quite awhile now.  If the Fed fails to deliver it could result in major disappointment and could cause markets to sink.

Tapering Down The Doses Of QE

In essence, the Fed has created a real problem child, that is addicted to the highs of quantitative easing and in danger of going into real withdrawals should QE3 not occur and a slow down occurs in the economy.  We have become a nation that thrives on success and recoils at any hint of an economic drawback.  As a result we could see a real touch market if investors don’t get their “fix” from the Fed in upcoming months.  As an investor these are real tumultuous times and it would be imperative that you ensure you are properly positioned for whatever is to come in the future.  For more information on how to position your assets to decrease your exposure while increasing your profit potential visit redmoneyupdate.com 

http://seekingalpha.com/article/848531-can-the-fed-save-the-economy?source=email_macro_view&ifp=0