Can the Fed Change the Fundamentals? Has It Already?

The Fed is already having an impact on market fundamentals, but is it showing up in the economy?

The Federal Reserve, the US central bank, meets today to determine its next step to help the recovery. To guide you through the muck of monetary policy, the Washington Post has put together another great visual explainer of the Federal Reserve's newest strategy for boosting the recovery by buying hundreds of billions of dollars of Treasuries with newly minted money.

What is that supposed to do? Four things: (1) Lower long term interest rates to make borrowing cheaper; (2) Raise inflation expectations to encourage spending today; (3) Lift the stock market to make businesses and investors feel wealthier; and (4) Make US dollars cheaper to make US products cheaper to increase exports.

What stands out from the interactive is that since late August, when Fed Chair Ben Bernanke first floated the trial balloon of further action, all of these things have already happened when investors tried to anticipate the next round of easy money. Thirty-year Freddie Mac mortgage rates are down. Inflation is up slightly. The S&P 500 index is up 100 points. And the dollar is off 7 percent.

fed action.png

The market fundamentals are changing, but is the economy? It's almost certainly too soon to tell. But savings are down slightly in September (bad in long term, but maybe good in the short term if we want spending to be brought forward), leading indicators are healthy, and new and existing home sales continue to improve. November 2010 will almost certainly represent the bottom for incumbent Democrats. Hopefully the same can be said of our Summer/Fall Stall.