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The Fed Is Wall Street’s ‘Drug Dealer’: Lance Roberts

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Guessing whether the Federal Reserve will undertake another round of quantitative easing has become a popular parlor game on Wall Street. As could be expected, ahead of the Fed's Tuesday policy meeting, chatter has been renewed over whether the central bank should and could institute another round of QE to help the economy and keep its two mandates, high inflation and unemployment, at bay.

Despite a more stable economy in recent months, the word last week was that the Fed is considering another potential long-term bond buying program called "sterilized QE." This program would be similar to QE2, except this time, the Fed would restrict how banks can use the funds earned from the sale of the securities. Markets loved the idea, since with each round of additional easing, asset prices have jumped.

Lance Roberts, CEO of Streettalk Advisors, compares the Fed to a "drug dealer" for Wall Street -- he says Fed Chairman Ben Bernanke took on a third unofficial mandate after QE1 to "boost asset prices," because that increases consumer confidence and props up spending.

The Fed's first installment of QE involved buying more than $1 trillion in mortgage-backed securities in 2008. QE2 came in the form of buying $600 billion in long-term U.S. Treasury securities in 2010. And the most recent round of easing last fall, dubbed Operation Twist, involved selling-short term U.S. Treasury securities and buying the same amount of long-term ones, with the goal of pulling down long-term interest rates.

The impact has been great for the markets. All three major U.S. indices have nearly doubled since the lows of March 2009. But in terms of the real economy, quantitative easing has done little to help home prices or wage growth and only recently has the jobs picture started to improve.

"The issue now is what are we going to do from here? My concern is [the Fed] cannot do much." Roberts tells Henry in the accompanying video. "The problem is that each one of these have less and less relative effect on the economy and as well as the markets. We're getting less gains out of it."

In addition to becoming less and less effective each time, the impact of inflation has to be considered.

"Every time you implement QE, you create inflationary pressures. Oil prices go up, food prices go up and the average American is not seeing wage increases. They are having a declining rate of disposable income," he says.

The Fed is well aware of the impact of inflation of any easing program on the consumer. However, it faces a conundrum, says Roberts. "The Fed needs inflation to try to inflate their way out of debt, but the problem is now they have tapped themselves into artificially low interest rates, and you can't have both."

Even with the talk of another bond-buying program, the consensus expectation for this week's meeting is for no additional QE and for interest rates to remain at "exceptionally low levels until late 2014," as the central bank signaled at its last meeting.

Roberts agrees with the consensus. "I think they are going to keep talking the point" of yet another bond-buying program. "They [will] keep talking the game, because right now the talk is keeping the markets going."

But eventually something has got to give, says Roberts. Either the economy needs to fully recover so that the Fed does not need to institute another round of easing, or the markets will eventually call the Fed's bluff. Roberts believes the latter will happen first since he does not currently see any real strength in the underlying economy.