(By Kevin Donovan) Not to put too fine a point on it, but the stock market is telling us it's the bottom of the ninth and the home team is looking for Mighty Casey to come through for Mudville this time around.
Equities staged a rally on the run-up to the Federal Open Market Committee meeting, hung on Wednesday afternoon even after learning no real monetary ease was on its way and then had its fingertips pried from the cliff when the global data dump Thursday proved too depressing. Friday's grudging clawback was not persuasive.
Is the market right? Before Thursday's selloff, the Federal Reserve signaled it remained unconvinced recession loomed. Operation Twist? Come on, man. The 10-year Treasury note is already yielding just 1.60% or so. The next stop is you pay the government for the privilege of loaning it money. Some ease.
Maybe the Fed is still unconvinced, but if the June jobs data, due to be released July 6, proves as weak as the May report, don't be surprised if the FOMC pulls a rarely used lever – an intermeeting action to add liquidity – using the only weapon it has left, that is, another round of quantitative easing.
Fed Chairman Ben Bernanke says the Fed is not powerless. His colleague, Richmond Fed President Jeffrey Lacker says it is.
In a statement, Lacker said:
"I dissented on this decision because I do not believe that further monetary stimulus would make a substantial difference for economic growth and employment without increasing inflation by more than would be desirable.
"While the outlook for economic growth has clearly weakened in recent weeks, the impediments to stronger growth appear to be beyond the capacity of monetary policy to offset," Lacker said in a statement outlining his reasons for dissenting from the FOMC's action extending "Twist."
Lacker's stance is clearly a minority view. For his part, Bernanke insists the Fed still has the horses to ride to the rescue.
"In case things get worse, we are prepared to protect the U.S. economy and financial system," Bernanke told reporters at a press conference.
The Fed Funds rate is already near zero and "Twist" is still in place. That can only mean expanding the Fed's balance sheet with a third round of asset purchases, or quantitative easing, in case those "things" Bernanke mentioned do get worse.
And the biggest thing that could get worse is employment. The high-frequency report on initial jobless claims puts the four-week moving average at 387,350, the highest level in nearly seven months.
Expect the weekly claims data from the government and the private-sector report from ADP on job growth to be watched closely as harbingers of what the Bureau of Labor Statistics will report next month. If nonfarm payrolls are as weak as May's gain of 69,000, the FOMC will meet via teleconference and pull the trigger.
Complicating the outlook is the political backdrop. Would the Fed be reluctant to act if it thinks it will be seen as aiding Obama? Unlikely, in our view. Bernanke, a Republican, is a serious man.
The Richmond Fed's Lacker may well be right. The Fed's cyclical tools may indeed be powerless against structural headwinds. But you've got to try, even if it's the bottom of the ninth and Might Casey whiffed in his last at-bat.