Friday, November 05, 2010

Why Is the Fed Priming the Pump?

Go figure. The mighty, all-knowing, all-powerful Ben Bernanke Fed is set to pour 900 billion new dollars into the economy over the next eight months. But it may be launching this pump-priming operation at exactly the time the economy is picking up. Huh?

Today’s jobs report was the best since last May. Nonfarm payrolls increased 151,000, with upward revisions of 110,000 for the two prior months. Similarly, private payrolls increased 159,000 in October, with sizable upward revisions for September and August. It’s not a fabulous report, but it’s certainly the best in a while.

Other October economic stats — like the two ISMs and car sales — are also pointing to a stronger economy. Maybe 3 percent growth instead of 2 percent.

Unfortunately, the unemployment rate is stuck at 9.6 percent, with household employment dropping unexpectedly by 330,000. And of course, both the nonfarm and household surveys need to rise by about 250,000 per month in order to chop down unemployment. So let’s hold the champagne celebration.

But the question is this: If jobs and the economy are improving, why is the Fed launching QE2? Maybe it should keep it in the dock. Let’s not risk a dollar collapse for a change. Gold prices are marching toward $1,400 an ounce.

Foreign central bankers are furious at the Fed for pouring more dollars into the world economy. And all this hot money is going to go to countries in Asia that don’t want the new dollars.

German finance minister Wolfgang Schaeuble said, “With all due respect, U.S. policy is clueless.” And former Fed chair Paul Volcker said the Fed’s new easing “is not the kind of action that’s likely to change the general picture that I have described of slow, labored recovery.” Volcker also said the Fed’s monetary easing could eventually lead to inflation. He called on the central bank to be cautious about taking further quantitative-easing steps.

Maybe the Fed ought to hold off for awhile. A tax-rate freeze and deep budget spending cuts look to be coming from the new Republican Washington. That will help restore confidence and might get businesses to step up their investment with all the profits and loose cash they have to spend.

Leave QE2 dockside, I say. The U.S. economy just might be turning over a better leaf. Change is in the air. That’s just what the strong stock market is telling us.