Doves Take Flight But More Fed Action Is Not the Answer: Axel Merk
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The Federal Open Market Committee will release its interest rate decision today at 12:30 p.m. ET Wednesday. Interest rates are expected to remain at zero, as the Fed has pledged to keep rates low at least through mid-2013.
The question on many investors' minds is whether the Fed will begin another round of bond-buying, a.k.a. quantitative easing. The U.S. economy has surprised to the upside over the past few months, beating back recession talk although the unemployment rate remains uncomfortably high.
The Fed has a dual mandate: full employment and price stability. The unemployment rate has fallen to 8.5 percent - the lowest rate in three years - but many economists attribute the decline to a smaller pool of people searching for jobs. Many of the long-term unemployed have simply stopped applying. The Fed's aggressive bond-buying strategy has won its fair share of critics who say the economy has not improved despite the Fed's purchase of more than $2 trillion of securities since the start of the financial crisis.
Axel Merk of Merk Funds tells The Daily Ticker's Aaron Task that the Fed's monetary policy actually hinders the economy's recovery and its insistence to "keep the floodgates" open puts downward pressure on the U.S. dollar.
"We have a Fed that wants the housing market to go up at just about any cost," Merk says. As long as the Fed maintains its uber-easy stance, the longer it will take to remove the "bad stuff" from the system, he suggests.
If the Fed signaled it would raise rates, people would be "racing to buy a house," thereby removing excess inventory from the market and stimulating demand again, Merk says.
Even with mortgage rates near historic lows, many Americans have shied away from buying because of the uncertain jobs picture. Real estate data provider Trulia Inc. found that buying is cheaper and more affordable than renting in 72 percent of major U.S. cities. Bernanke reiterated his concerns about the health of the housing market, writing in a recent report that "house prices have fallen an average of about 33 percent from their 2006 peak, resulting in about $7 trillion in household wealth losses...Continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery."
Inside the Mind of the FOMC
Beyond any signal about QE3, what's most interesting about Wednesday's announcement will be reading the projections and forecasts of Fed officials, part of the FOMC's new communications strategy.
Deciphering prior Fed statements was a task even seasoned economists and Fed watchers had difficulty with, and now the whole world will be able to get inside the brains of FOMC economists. They will be releasing short- and long-term rate projections in addition to giving explanations and analysis supporting their views.
Most Fed watchers have welcomed the central bank's new commitment to transparency but Merk notes the FOMC is now chock-full of doves. Due to the committee's normal rotation, Richard Fisher of Dallas, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis -- who dissented against Bernanke's policies last year -- are not voting members of the FOMC in 2012.
