Why “Don’t Bet Against the Fed” Is Now Truer Than Ever

By Sasha Cekerevac for Investment Contrarians | Aug 8, 2012

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With the recent Federal Reserve meeting just concluded with no change in monetary stimulus policy, all eyes are focused on its September meeting. As the economic data continues to deteriorate, this is having a negative impact on the economic forecast for the future. The Federal Reserve is closely monitoring the situation and, with a lack of strong, positive news, I believe that additional monetary stimulus will occur by the end of the year to avert a continuing diminished economic forecast for the future.

Recent comments by Eric Rosengren, who is the Federal Reserve Bank of Boston President, will surely reignite additional expectations of monetary stimulus, as he commented that the central bank should enact open-ended quantitative easing. He also suggested the Federal Reserve should boost this monetary stimulus program by substantial magnitude.

The economic forecast for America continues to be subpar. Obviously, this Federal Reserve Bank president and others are voicing the opinion that the current monetary stimulus policy is not enough to decrease the unemployment rate and increase the growth rate of the country. The wording that open-ended quantitative easing should be the new monetary stimulus policy initiative is quite a change for Federal Reserve standards.

This policy initiative would be quite bullish for certain markets, such as gold. With the payroll data last week not being horrible, many were led to believe that Federal Reserve policy might be on hold. Even with some doubts, gold has held up quite well. Gold stocks have also performed reasonably well, but I believe there is more to come.

As many analysts will continue to decrease their economic forecast for the American economy, there will be increasing calls for the Federal Reserve to continue additional monetary stimulus programs. In an environment in which the economic forecast remains poor for so many years, it does raise concerns that the limits to monetary policy are becoming more apparent. Considering the length of this latest downturn, the Federal Reserve is being hamstrung by fiscal policy over which they have no control. Trying to determine a proper economic forecast in which multiple parties are involved becomes increasingly difficult.

It should be noted that Rosengren is not a current voting member of the Federal Reserve. The rotating body of Federal Reserve presidents will change in 2013, at which time Rosengren will then be a voting member. He will join several others in the Federal Reserve who are leaning towards significant monetary stimulus policy for some time to come. I would continue to look for gold to remain strong until the economic forecast begins to change as positive data starts to emerge. Until that time, it’s dangerous to bet against the Federal Reserve.

Tags: economic forecast, Federal Reserve, monetary stimulus