Every day it seems that there is another call for the Federal Reserve Board to take additional action to stimulate the economy. In reality, these calls are not likely to result in major action. There are two reasons for this. The first reason is that the Fed has used up most of their ammunition. Rates are super low and the Fed has indicated that they are going to keep them low until the end of 2014. Yes, the Fed could purchase more Treasuries and home loans and force rates down a bit more, but the consensus is that today's record low rates are not holding back the economy. Secondly, the Fed does not control the most important factors that are affecting the economy. The debt crisis in Europe continues to cast a pall over the markets. The Fed can do nothing about Europe overtly. Of course, behind the scenes they will work with the European Central Bank to try to influence the ECB's actions.
Furthermore, the Fed does not control Congress or the elections. Elections always cause a pause in everyone's minds because we don't know what is going to happen in November. This year, the mode of uncertainty is even worse because we are facing major budgetary issues, including the expiration of tax cuts and automatic spending cuts which could take place early next year without Congressional action (the "fiscal cliff"). Finally, one major drag on the economy is not likely to end soon. As much as we want to complain about government spending, the end of fiscal stimulus measures and state and local budget cuts have actually caused a drag on economic growth this year. While less government spending will help the economy in the long-run, it hurts right now as witnessed by the employment report which continues to show a gain in private sector jobs but a loss in government jobs over the last several quarters. So, the question remains, where can the Fed help? Any action taken by the Fed will help not just through real economic stimulus but by giving us a psychological boost. A Fed taking action -- any action -- raises confidence and confidence is a major factor in any recovery. Even if the Fed does not take action but indicates that a stronger recovery is around the corner, we could wind up with the same result. It is all about confidence.