FOMC Preview-Is Chairman Bernanke Backed Into A Corner? Think Again

Could we receive a surprise announcement tomorrow by Federal Reserve Chairman Bernanke,”The Fed has cut rates again”? The pervasive feeling around the hallowed walls of Wall Street investment houses is the Fed will initiate another round of quantitative easing. It is almost being demanded by Wall Street economists as they read through the tea leaves of economic data and don’t like what they see. Chairman Ben is being called out. Some opine he’s coming to a gun fight with a pea shooter. The rationale being, with rates already at zero, he does not have many tools left to fend off any further economic weakness or equally worrisome the re-ignition of deflationary pressures. I mean, he cannot cut rates to zero minus a quarter percent. The rallying cry to ramp up the printing presses and sling another oh, trillion or so at the economy and see what happens is growing louder.



I would suggest they are missing one very obvious measure he has in his gun belt. Another round of quantitative easing should be shelved as a last resort. We’ve debased the good old US greenback enough this year. Keep that bullet in the chamber for the definitive signs of a double dip recession which are not apparent yet. Here is a simple two step plan that accomplishes what the pundits are suggesting is needed while leaving the Feds printing presses idled.



1. Currently banks have been parking their excess reserves at the Fed and receiving a return on those reserves for the first time ever. The Fed needs to end this practice of paying interest on reserves. Those monies earning zero now, would be taken back by the financial institutions and either redeployed into small business loan and consumer credit or another potential use would be to purchase investments securities, US Treasuries, FNMA and Freddie Mac Mortgages for instance, which would assist in keeping rates ultra low and accommodative. Exactly what they are suggesting the Fed needs to do. How much you ask? $1 trillion+ is sitting at the Federal Reserve currently.



2. The Obama administration needs to take a page from the Bush playbook. I know most copies were burned and are hard to come by. However, there were a few notables. This one, a tax cut for companies with foreign earnings. A cut to 5% from 35% to encourage companies to repatriate those profits sitting overseas, being invested overseas, creating jobs on foreign soil. Incentivize corporate America to bring those profits home to the good ole US of A to invest in their domestic plants and hire the best workers in the world. The last time we offered up this tax holiday the response netted $500 billion+ coming back to our shores.



That’s $1.5 trillion potentially available for investment in new plants, employees and /or asset purchases. Just happens to be the same ballpark figure economists are calling for the Fed to ramp up the printing presses and magically create for another round of quantitative easing. Aside from that $1.5 trillion, if we’re able to gain the confidence of corporate America that the economy is on firmer footing, that those new hires will firm up consumer demand and lead to a sustainable recovery, it just may encourage them to release some of the $2 trillion sitting on the balance sheets of non-financials. I’m not necessarily ruling out that another round of quantitative easing won’t be necessary should the economy come to a complete stall and asset prices begin a spiral downward, I am suggesting there is currently another prudent potential response. This one is so obvious it’s virtually hiding in broad daylight.