The Federal Reserve Forecasts More QE? Say It Ain't So!

In a new working paper released by the Federal Reserve, the Federal Reserve has essentially come to the conclusion that it has almost no room to do anything to help the economy should it take a hit in the next couple of years. With short-term rates already nearly at zero and no end in sight for this policy, the Fed has realized that the power it wields to control interest rates is nearly zero as well. There's no room for it to maneuver. So what is the Fed's likely response in such a crisis, given that it can't do much in the way of interest rates?

Quantitative easing. The report cites three models for comparison to illustrate what the Fed's options could look like. The first, which is a linear model of interest rate manipulation that drops into the negative, is admittedly unrealistic. The second simply has the interest rate pushed to zero and holds it there until unemployment stabilizes (however that's going to happen, which would be anyone's guess). The third, and what is billed as the likeliest and worst-case scenario, is pushing interest rates on short-term lending to zero along with at least $2 trillion of QE, with an option to expand to $4 trillion if the situation is particularly severe. In other words, manipulate markets and print more money.

At this point, anyone expecting anything different out of the Fed is either naive or willfully ignorant. Economic recovery from 2008 has been mediocre at best and practically non-existent at worst. The President can brag about job creation and economic activity, but it belies the fact that a) jobs that have been created have been lower-paying and for less hours and b) most of that economic activity hasn't been productive in any capacity. Despite this, the Fed has kept the interest rate low since the crash hit, in some vain hope that it will eventually turn around. The government had to fudge numbers to make it look like it was working.

So what's going to happen the next time we have a serious economic shock (like, say, the student tuition bubble looming on the horizon)? Things are going to get rough, and it's going to happen quick, fast, and in a hurry. The Fed will be powerless to stop it or even mitigate any damage. This, of course, goes without saying; you can't fix an economy using the same methods you used to ruin it in the first place. Manipulating interest rates and artificially inflating currency only creates more problems and exacerbates the problems they try to solve.

Remember, kids: the Fed has no real power. The market, just like truth, will out, no matter how hard the lever-pullers at the Federal Reserve try.