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Kass: What to Expect When We're Expecting

This column originally appeared on Real Money Pro at 9:30 a.m. EDT on Sept. 13.

NEW YORK (Real Money) -- Though I believe the odds are less (probably closer to 65%/35%) than the near unanimous market view of more easing, in all likelihood the Fed will announce more cowbell this afternoon and will also probably announce a modest reduction in domestic economic growth projections for 2013-2014.

A weak jobs report last Friday; less robust economic data in the U.S., which has disappointed the Fed relative to its expectations (business investment, etc.); slowing in growth in Europe and China; the emerging drag and growing threat of a domestic fiscal cliff at year-end; and continuing reports by Jon Hilsenrath of The Wall Street Journal (and others) all point to this decision.

Perhaps most importantly, in strongly worded phrases, the Fed (in Jackson Hole and in the FOMC minutes) has led the market to expect more easing -- and the Fed is not typically in the business of shocking the markets.

I expect:

  • a one-year lengthening (through mid-2015) of the period when the federal funds rate will remain low;
  • coincident with a continuation of the maturity extension program (i.e., Operation Twist) until year's end, large-scale, unsterilized and open-ended asset purchases will be initiated; and
  • forward guidance might even be expanded beyond the forward guidance of the fed funds rate (similar to what has been recommended by Chicago Fed President Evans, in which there would be no interest rate hikes unless unemployment was below 7% and/or inflation exceeded 3%, appeasing both doves and hawks that vote).

The Fed's Impact on the Real Economy Is Waning

As I have previously written, blind faith in the continuing easing policies and in the forecasting ability of Ben Bernanke and the Fed seems unjustified. Ben Bernanke's poor forecasting capabilities rival those of predecessor Alan Greenspan, and that is not a good thing for investors who hold onto the premise of a self-sustaining domestic recovery.

Bernanke got the housing bubble wrong, he failed to anticipate the recession in 2008 and the role and systemic risk of derivatives (which Warren Buffett calls financial weapons of mass destruction), and he didn't recognize until 2010 that the U.S. unemployment problem was nearly as much structural as cyclical.

And now I believe he is wrong regarding the benefits of further quantitative easing. Remember, we are over three years after the Great Recession and after the implementation of QE1, QE2, Operation Twist (and its extension), and U.S. real GDP is growing at only about a 1.8% rate.

In reality, more cowbell may actually be counterproductive in penalizing the savings class, creating a disincentive for banks to lend and by putting more pressure (as commodities rise) on the middle class (which I call screwflation).

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