Analysts and investors demand clarity when a company reports or offers up guidance. But when it comes to the Federal Reserve, investors and analysts don’t seem to demand the same level of clarity, even though the central bank has been what I would label “wishy washy” as far as its policies and what it offers up to the market.
The stock market is trading (and it has been for a while) on what the Federal Reserve says about its quantitative easing program, namely its monthly bond-buying strategy.
Yet the Federal Reserve appears to be saying one thing, only to contradict it with the next statement. This type of confusion and uncertainty is not what I want to hear. I want more certainty in order to formalize my trading and investment strategy. The cloudiness offered by the Federal Reserve doesn’t help.
Case in point: at last week’s Federal Open Market Committee (FOMC) meeting, Federal Reserve Chairman Ben Bernanke, to the surprise of nearly everyone both on Wall Street and Main Street, announced that the bank had decided against tapering, despite what I see as moderate growth in the economy. Yes, the country continues to slug along, but with the second-quarter gross domestic product (GDP) growth at 2.5% and with the Federal Reserve estimating the country will continue to expand at a rate above two percent this year and in 2014, the Federal Reserve should have begun to rein in some of its bond buying. Pundits were estimating a $10.0-billion cutback to start.
Well, even that small cut didn’t happen. Bernanke said the economy was still fragile, and the Fed didn’t want to take a chance with the economic recovery, especially with the recent soft jobs market report.
My response is that nothing is perfect and the central bank should have eased off anyway. The Bank of England decided against any new stimulus, and its GDP growth was—and is—worse than that of America.
Bernanke needs to gather up his courage and begin to taper. Instead, he is all over the map. At the May FOMC meeting, the Federal Reserve suggested it would begin to taper this year. Now, the Federal Reserve says GDP is stalling a bit, so the question of when tapering will start is unclear.
For the stock market, the lack of clarity from Bernanke will continue to drive uncertainty going forward, which means trading could continue to be tepid. Will it be October or December when the tapering begins? Or will it begin after Bernanke leaves the Federal Reserve in January? The fact is Bernanke appears to lack the confidence to make a tough decision.
Next up as the head of the Federal Reserve will likely be Bernanke clone Janet Yellen, the current vice-chairman of the central bank. I guess that means more of the same.
If I were you, I would be taking some money off the table should stocks edge higher, as the underlying fundamentals really do not support their current record-high levels.