Yesterday we posted these comments regarding the FED:
Another anecdotal issue is that the FED is due to report their unbelievably tortured analysis and process geared to raise interest rates by only 25 basis points. However, at this point the FED credibility is pretty tattered and IF they raise interest rates they will be viewed as non-data dependent to the contrary of their propaganda. If they do not raise interest rates they will be show that the verity of their analysis and policies is likely sorely lacking. In either case, the best the FED can do is damage their credibility or damage it more. Not particularly wonderful outcomes and for the markets this could imply that no matter what the FED does will be received negatively.
It is worth noting that if things get too challenging in the markets, the Fed may decide not only "no hike" but QE and effectively "rate cut". This woul be data driven of course and all in the span of less than 2 weeks of data. The question is would any new QE solve the problem? While there is no reason to doubt that a rally on some QE announcement would occur, the problem is that we are facing liquidations of malinvestments. As in 2010, after the initial rally in equities, QE funds and liquidity sought an avenue for allocation - the chosen allocation was not previous dubious products - and did not immediately go into equities or bonds - it went into commodities. This caused dislocation in the commodities markets with many commodities rising hundreds of percent in a very short time - which in turn caused the "Arab Spring" (which was no "spring" but rather a revolt by starving citizens) as many poor and middle-class Middle Eastern people were unable to afford necessities of rice and other foods. They were forced to choose between buying food or paying rent. Similarly, were sitting in the situation in which junk bonds need to be liquidated and QE liquidity would not be allocated easily to junk at this time. Therefore, the only option for the Fed, which this analyst feels would further damage their credibility, would be for the Fed to directly purchase declining assets and junk bonds. Certainly, the FED can purchase junk bonds and represent them on a portfolio at par as they have done with many of the bankrupt entity debt that that they purchased in 2008 and 2009 (Maiden Lane III Portfolio) - but this does not inspire confidence.
So, in summary, it appears that if damage becomes pronounced to the equity and debt markets now or int he future theFed may need to attempt to directly arrest it. However, their tools are not precise and not effective. Moreover, they would be seeing as hypocritical because how could they not see this coming, and, in fact, want to do a rate hike just before major damage to bond and equity markets would occur. Either way, the situation as it seems to this analyst, is a no-win outcome for the Fed, no matter what they do. The best probable scenario that likely exists is that the Fed just buys every asset that is going down and attempts to arrest decline by increasing the balance sheet further and also deteriorating its quality.
Is it really possible, that if these options are even on the table? And would they work or make a difference for more than a short time?