Weighing The Week Ahead: Something New From The Fed?

As I wrote in new investor resource page -- a starting point for the long-term investor. (Comments and suggestions welcome. I am trying to be helpful and I love feedback).

Final Thoughts on the Fed
I expect the Fed to replace "operation twist" with a new asset purchase policy, keeping the monthly target of $85 billion. That is only the start.

This week's FOMC meeting also comes with a press conference from Chairman Bernanke. The Fed's latest initiative, popularly dubbed QE3 or QE infinity, is designed to change market expectations.

It has not worked.

In fact, the Fed Chair's statements have actually fostered the misperceptions listed in the introduction. It is time for clarity instead of Fedspeak:

• The Fed is encouraging businesses to make investments by reducing lending costs. The effect on individual savers is a side effect, not a goal;
• The Fed is interested in asset prices only as an indicator of the economic effectiveness of the policies. The "wealth effect" is also a tertiary mechanism for transmitting policy effects. It would be better to quit mentioning these secondary points. Whenever they are cited, the financial media ignores everything else and pretends that this is the main theme;
• The Fed has expanded the balance sheet, but the money supply has increased at a pace that is lower than the long-term average;
• The Fed's policies take six months or longer to occur. Traders and pundits incorrectly over-estimated the first QE's and are now under-estimating this one.
• The Fed is determined to change expectations, willing to accept more inflation, and geared to much lower unemployment. The individual data releases have little influence.

Since I do not have Bernanke's ear, I am not expecting more clarity. For those who understand Fed policy, this is an opportunity. If you do not wish to fight the Fed, the first step is to understand the policy. How else can you know what you are not fighting??

A Final Thought
The fiscal cliff participants continue to prove in public that they are bargaining hard. It does not matter that Congress took a long weekend. I am still hopeful for a pre-Christmas resolution on the tax issues with overall debt questions coming later. There will be some firm guidelines, but the opportunity for Congress to participate in the details.

The market gyrations will continue, but do not expect meaningful cliff news this week.

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Written By: Jeff Miller