A person with a suspicious nature might think the Federal Reserve is trying to rig the stock market.
And, as you know, I’m always suspicious.
You’ll understand why if you look at what happened on Tuesday. The Fed’s Open Market Committee concluded its policy-making meeting that afternoon and decided to do nothing to help the economy.
That’s never what Wall Street wants to hear, especially since there had been rumors of some new twist on the Fed’s inflationary money-printing campaign.
This time, the rumors were the Fed would do “sterilized” bond purchases — essentially buying longer-term bonds while selling shorter-maturity ones.
Think of it this way: Your car (or the economy) is stuck in the mud, and you decide to alternately hit the brake and the accelerator. You probably still won’t move, but it makes you feel better just doing something.
The notion of sterilized bond purchases had been leaked to a credible Wall Street Journal columnist last week, and it became the expectation in the financial community.
Only this new twist on the old printing-press scheme never happened.
The Fed concluded its meeting and, at about 2:15 p.m. Tuesday, it put out a communiqué that pretty much echoed the last one and would have left Wall Street very disappointed — except that something else was happening.
JPMorgan Chase, the nation’s biggest bank, announced that it was raising its cash dividend, buying back lots of its stock and — this is the important part — doing it with the Fed’s approval.
Everyone on Wall Street knew at the time that the Fed was going to release its so-called bank stress tests on Thursday. JPMorgan’s announcement told people who understand this sort of thing that it had passed the test.
Other banks followed with announcements, and the Fed decided to release the stress-test results after the stock market closed on Tuesday, instead of today.
When I asked, the Fed said it moved up the release date because of “inadvertent” disclosures, which I assume meant the JPMorgan announcement. A Fed spokesman wouldn’t go into details.
But if JPMorgan needed permission to raise its dividend and buy stock, wouldn’t it also have needed the Fed’s approval of that announcement’s timing? Really, is the Fed so ineffective that it couldn’t keep the lid on JPMorgan’s press release for two more days?
Fed Chairman Ben Bernanke has clearly been concerned about the stock market. His first two quantitative easings, which added newly printed money to the nation’s economy, were announced at times when the stock market was declining fiercely. And his Operation Twist, a variation of QE, also came when the equities market was looking ragged.
So a suspicious person — me — wouldn’t be surprised if the Fed timed its Tuesday announcement and JPMorgan’s “inadvertent” leak to offset Wall Street’s disappointment that the sterilized bond purchase wasn’t going to happen.
And why didn’t the Fed spin its sterilized wheels?
Because Bernanke is in a ditch.
On the one hand, he’d like desperately to report good news on the economy, especially since his boss, President Obama, is trying to keep his job when so many other people don’t have one.
So the Fed’s communiqué on Tuesday said — as it usually does — that the economy was growing moderately.
That wouldn’t be such a problem — if it weren’t for the fact that Bernanke yesterday said that the economic recovery was “frustratingly slow.”
So which is it?
Bernanke needs economic growth to keep his boss happy. But he needs “frustratingly slow” growth to have an excuse to take more action — action that the stock market desperately wants.
One last thing: Those stress tests of banks — which 15 of the 19 largest passed — used the following supposedly extreme hypothetical conditions to determine if financial institutions were strong enough to survive: a peak unemployment rate in the US of 13 percent, a 21 percent decline in housing prices and a 50 percent drop in the stock market. The jobless rate is a lofty 8.3 percent, but at first glance seems well below the stress-test level of 13 percent.
But the government’s other unemployment rate — which includes millions of people who are underemployed because they can’t find full-time work or have given up looking for a job — is at 14.9 percent. And housing, which is most important to banks because of the mortgages they hold, has easily fallen 23 percent in most parts of the country.
So the stock market is the only one of the three crucial stress-test indicators that is doing well — with the Fed’s help, a skeptical person might say.
This is really my last thought: I don’t mind if the Fed rigs the stock market — it even has my permission. But if stocks suddenly collapse and regular Americans lose fortunes, shouldn’t the person or persons responsible go to jail for market manipulation?
