The Federal Reserve (the Fed) is starting to sound like a needy lover — willing to say anything to get you to stick around.

In an effort to further inspire confidence in the fickle investors that drive the U.S. economy, the Fed has announced it is abandoning its calendar deadline in favor of a performance deadline. Yes, the Fed is no longer sticking to its very generous “well into 2015” act.

Instead, Bernanke and Co. have vowed to continue their expansionary efforts until, nationally,:

  • unemployment falls to 6.5%; or
  • consumer inflation exceeds 2.5%.

The revised “deadline” is not the only tactical maneuver the Fed has deployed. They are also ramping-up efforts in the arena of quantitative easing (QE) – creating and pumping more money into the economy.

With the advent of their plan to purchase $40 billion a month in mortgage-backed bonds (MBBs), the Fed was set to discontinue their Treasuries purchases to avoid creating new money. However, instead of scaling back, they have now promised to continue their T-bond buying to the tune of $45 billion a month.

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High anxiety over the Fed’s exit

first tuesday insight


At this point, after more than five years of monetary stimulus, it almost feels like the Fed is flogging a dead horse. What is most astonishing is that with such unprecedented and aggressive action, things appear to just now be stabilizing. And with these new announcements, it seems that the perception at the Fed is that the recovery is still raw and tender, susceptible to any waiting trauma that may send it back to the ER.

And just what is this potential threat? The looming fiscal cliff, for one.

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Sending a sacred cow off the fiscal cliff: the MID

At this point, monetary stimulus is maxed out (but for going negative, which would really get banks lending again). Congress needs to act with fiscal stimulus, not austerity which is what the cliff is all about. Bernanke has said this time and again. So has Nobel Prize-winning economist Paul Krugman. And so has first tuesday.

Unfortunately, instead of spending taxpayer money to create jobs, it is being spent to fund a do-nothing Congress, intent on political posturing.

While the National Association of Realtors (NAR) and their subsidiary real estate trade unions clamor to protect the outdated mortgage interest tax deduction (MID), we have our own suggestions. Increase government spending on infrastructure.

Guess where better infrastructure leads? Toreal estate. Such a move would literally create jobs, first funded by the taxpayer, but eventually setting off a virtuous cycle of growth via permanent employment. And that becomes home purchases. As the infrastructure is supported, so too are the property values that surround it. Thus, personal wealth is generated by increasing home equities.

Aside from specific plans for spending, Congress would do well to take a cue from the Fed. Demand for homes has two sides:

  • willingness; and
  • ability.

Ability only comes with jobs. Willingness, however, comes from confidence. It’s time to even out the Fed’s monetary stimulus with that of the fiscal variety.  Create some confidence dear Congress, lest we cut and go the way of Greece.

Re: Fed ties stimulus to jobs, inflation in unprecedented steps to bolster economy