Summary – Much Ado…

The Federal Reserve’s Open Markets Committee met this week and - after high expectations of additional

stimulus - did exactly nothing. The accompanying statement only updated the language, making it clear a

meeting actually occurred but providing no real insight into action that may follow.

The problem is the Fed hasn’t much ammunition left and wishes to reserve its final bullets with hopes no

one notices their ineffectiveness.

By talking at the markets, implying grand promises of support to come should the need arise, they have

painted themselves into a small and uncomfortable corner. They want to be needed in order to maintain

power, but with nothing to do that causes a real effect on the economy, acting would only confirm their

impotence.

Only Congressional agreement can clear the fog of uncertainty that both businesses and consumers face

today allowing for capital investment to ramp up, and getting the economic machine to function once again.

What’s Important…

QE or not QE? That is the question. Whether ‘tis nobler in the mind to suffer the slings and arrows of a

higher stock market, or to take arms against a sea of potential inflation and by opposing, befall it? To die, to

sleep no more and by a sleep to say the Fed will do nothing and hide their inability to affect the economy

this day so that they may live to fight another.

It’s not just us! The head of the European Central Bank is suffering a loss of confidence of his own making

when last week he stated his intention to “do whatever it takes” to support the euro and then following this

week with a do-nothing central bank gathering.

Extension of the “twist” has some effect on markets, but little on the economy. Indeed, since announcing the

FOMC operation to twist the yield curve, we’ve seen longer rates decline including mortgage rates which

reached an all-time low of 3.54 percent according to Bankrate.com. But will lower than low interest rates

get the economy going again? Methinks he doth jest!

With a do-nothing August meeting, the stage is set for high drama in the heat of the election. Should market and

economic activity deteriorate between now and the next FOMC meeting in late August, we could see Fed

action at the height of the election season. Or perhaps not as the Fed will strive to look politically

independent, especially in these divided times.

Quick Hits: The Fed August 3, 2012

What to Look for…

Regarding the Fed, I wouldn’t look for much that will actually affect the economy going forward. That is,

until it becomes time to reverse course. Though it may be too early to contemplate fully, as ineffective Fed

policy is today when they turn their eye on inflation, we’ll see a wrath of “slings and arrows” directed

toward potential price gougers.

A Picture is Worth…

Today, banks hold over $1.4 trillion on deposit at the Fed, basically doing nothing within the economy. The Fed’s efforts to date have been designed to increase total cash in the system and to get it circulating. The efforts have been tremendous, but the results do not match. Something else is going on: a lack of confidence in the system driven by uncertainty and indecision emanating out of the rest of Washington.

Written by:

Joe Morgan Chief Investment Officer SVB Asset Management @SVBJoeMorgan jmorgan@svb.com

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