No matter what you hear to the contrary, the Federal Reserve isn't going to announce another round of quantitative easing (QE3) on Thursday. Disagree with his policies or not, Fed Chairman Ben Bernanke isn't stupid. Taking that as a given, a bold assumption though it may seem to some, the Fed head has trillions of reasons to hold his fire for at least one more meeting.
Here are the best three:
1. QE does nothing to promote job growth
In his Jackson Hole comments last week Bernanke said the first two rounds of quantitative easing had led to the creation of roughly two million jobs. That's almost certainly a stretch, but let's run with it.
QE1 cost $1.7 trillion. QE2 cost $600 billion. Using Bernanke's math, it cost the Fed $2.3 trillion to create two million jobs. According to SSA.gov the average annual salary in the U.S. for 2010 was $41,674.
By the math given to us by Bernanke himself, each job created by QE has cost the Fed $1,150,000. In equity terms, jobs are trading at 27.5x top line salary (revenue). That's lunacy — even by government standards. (See: Why a Drop in Unemployment Rate Is Tragic)
2. The timing would make stimulus overtly political
QE may or may not spark a rally, but the historical evidence is strong enough to suggest it will. The S&P 500 rallied 33% over the course of QE1 (1/2/2009 - 3/31/2010) and 11.5% during the QE sequel (11/12/2010 - 6/30/2011). While we're tabulating returns, it seems reasonable to include the 14% market rally from the Jackson Hole Jawbone when QE2 was effectively announced on August 27 of 2010 and when the program actually started.
The Federal Reserve is apolitical, in theory. In reality, handing a sitting president a potential two month rally through a stimulus program in a non-crisis situation would all but seal the deal on Obama's re-election and trash whatever credibility the Fed has left.
3. Europe is doing it for us
Last week ECB President Mario Draghi announced a plan wherein his bank would purchase foreign debt in an effort to artificially reduce yields. Dubbed the Outright Monetary Transaction (OMT) plan the deal would be tantamount to printing money to fund market purchases. Think of it as quantitative easing with an umlaut. (See: ECB Plan Sparks a Blue Chip Rally)
At least for the moment, Europe has bigger, more acute, problems than the U.S. and is certainly a bigger drag on the global economy. With Europe seemingly determined to spend its own trillions in fake money, manipulating rates even the most dovish of Fed presidents would logically favor the U.S. sitting out this round.
For all the noise about the markets needing or expecting another round of stimulus, stocks are doing just fine without it. The S&P 500 is up 14% so far in 2012 and more than 30% since QE2 ended. The jobless situation remains a national disgrace, but the first easing programs were wildly inefficient in terms of job creation.
Jawboning has worked as well as QE did and it costs much less. The smart move for the Federal Reserve is to stick with what hasn't been working for free. If Bernanke is smart the decision is obvious: he should do nothing on Thursday.
More Related:
The Only Way the Fed Can Surprise the Markets
Whether Jobs Data Bounces or Not, QE3 Is Coming Says Wilkinson
