Fed News Friday!

Top of the day everyone! Wow this week went by fast, now onto more shenanigans from the Federal Reserve and their counterparts…

Tuesday was a big day to keep your ear to the ground on the banker’s decision to further ease the economy.  Looks as if QE2 is coming right around the corner.  However, Bernanke’s concern right now in the public’s eye is assuring investor’s and consumers that Fed officials aren’t fighting two different fights.

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Over the summer the talk on the economy was divided between inflation hawks and those with deflationary fears.  The dichotomy among the Federal Reserve’s top officials was a threat to the market place which seeks strong guidance from the Fed.  Bernanke will be addressing this and the Fed’s best foot forward to bring us closer to economic recovery at Princeton University today in a speech titled “Implications of the Financial Crisis for Economics”.

The move they are predicted to make?  According to an article from Rueters, the Fed could begin purchasing MORE treasuries as early as November.  Since this was their tactic during the Summer that did not yield a recovery, the Fed will be depending on the attitude of investors and consumers.  They will also be hoping to manipulate that attitude with rhetoric rather than market proof.

An August Fed News Friday post talked about the idea of Self-Fulfilling Prophecy and how it is a powerful theory and the Fed can use this to their advantage.  By choosing words carefully Fed officials can pull the wool over eyes and breathe confidence into the market.

Since treasury yields are close to historic lows (around 2%) purchasing doesn’t make profitable sense, but could indirectly “help” consumers lower mortgage payments thus giving more money to spend in the economy.  However, the trend in the consumer economy right now is more savings based.  This excerpt seems to sum up the attempt the Fed could make to escape the possibilities of a double dip:

“If the fed buys [treasuries] here and now, it’s called interest-rate insensitive buying,” Ader said. “They’re not buying for economic reasons, they’re trying to drive rates lower than the market itself might clear.”

That would, in turn, make consumers and investors believe that conditions in the marketplace were about to turn. With rates at what Ader called “unnatural levels,” market participants might start to believe, for the first time, that prices and rates had gone as low as they could possibly go. Instead of waiting for further price decreases, they might finally start to buy, borrow and hire again ahead of a coming increase in prices and interest rates.

Can you believe that?  The Fed thinks they can control our behavior by purchasing up lousy bonds and making the market believe it is shifting toward an upward movement.  Zach Pandl, an economist from New York states:

“We see the main transmission method as working through confidence and expectations rather than working mechanically through interest rates and borrowing.”

Having to result to blatant manipulation to heal the economy goes to show past efforts of QE and stimulus packages did not seem to be doing the work they were created out of thin air to do.  While savings for consumers is on the rise and precious metal prices rising against a lowering dollar, the economy seems to be standing at a pivotal point.

The infamous former Chairman of the Federal Reserve during the Carter and Reagan administration and advisor to the President, Paul Volcker sounded pessimistic about a recovery, saying, “It’s been so difficult to get out of this recession because of the disequilibrium in the real economy.”

Let’s see what Bernanke has to say today at Princeton

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