VERSACE: Federal Reserve shows symptoms of insanity

ANALYSIS/OPINION:

The past five days have made for an interesting week. Tuesday marked the 11th anniversary of Sept. 11, a day of shock, horror, sacrifice and sorrow. A day that we Americans always should remember, no matter what NBC and “The Today Show” might think. (NBC broadcast a live interview with Kris Jenner, the mother of Kim Kardashian, instead of airing the Sept. 11 memorials that took place in New York, Washington and Pennsylvania). Wednesday marked the unveiling of the much-anticipated Apple iPhone 5, the latest and arguably the company’s greatest smartphone.

Also on Wednesday, Federal Reserve Chairman Ben S. Bernanke and the rest of the Fed’s policymaking body, the Federal Open Market Committee, kicked off their two-day policy meeting. Heading into the meeting, Wall Street expectations that the Fed would enact another round of easing were running high, according to a CNBC poll of 58 money managers, strategists and economists. After the disappointing August employment report released last week by the Bureau of Labor Statistics, 90 percent of the CNBC survey participants said they expected the Fed to launch another stimulative bond-buying program in the next 12 months. That is up significantly from 78 percent at the end of June and 58 percent in early June.

But as we have seen over the past few years, just because there are stimulative efforts does not mean economic growth will accelerate on a sustained basis. CNBC’s survey results indicate that even though 90 percent expect the Fed to ease further, nearly 6 in 10 of the respondents doubt that effort will lower the unemployment rate near term. The U.S. employment rate has been more than 8 percent for 42 consecutive months as of August.

There are several reasons behind the view that further stimulus will do little to move down the unemployment rate near term: uncertainty over the presidential election for one, and what that may or may not mean for taxes, health care and more. Another is the increasingly discussed fiscal crisis. This past week, House Speaker John A. Boehner, Ohio Republican, voiced concern that a divided Washington may be unable to avoid the looming fiscal cliff. As the Congressional Budget Office’s revised forecast points out, the $560 billion mix of spending cuts and tax hikes that make up the year-end fiscal cliff, if not dealt with, probably will cause a recession in 2013.

Neither the stock market nor companies big or small like uncertainty. If the CBO’s math is correct and the risk of a recession is increasing, it’s safe to say that uncertainty is on the rise. The saying “When in doubt, leave it out” comes to mind except that in this case, what’s being left out is likely to be corporate spending and hiring.

Two recent surveys not only confirm the caught-in-the-headlights mentality, but also reveal that businesses see slower growth in the back half of the year. Keep in mind that the U.S. economy grew only 1.85 percent in the first half of 2012. One survey, the August Wall Street Journal/Vistage Small Business CEO Survey, showed that roughly half of nearly 800 owners of small businesses in the U.S. expect economic growth to remain sluggish in the year ahead. Furthermore, amid a backdrop of economic and political uncertainties, many do not plan to boost hiring or increase investment spending anytime soon.

Another reading came from the National Federation of Independent Business, which is a small-business association. While the NFIB’s August Small Business Optimism Index showed some positive signs, few employers continue to think the current period is a good time to expand. The percent of owners viewing the current period as a bad time to expand because of political uncertainty reached a record high for this business cycle at 22 percent. The August survey showed that after all the stimulative efforts over the past several quarters, 20 percent of the survey respondents continue to cite weak sales as their top business problem.

This begs the question as to whether more easing will spur demand such that small businesses will feel confident enough in their outlook to justify adding workers.

As I have said before, one definition of insanity is doing the same thing over and over again and expecting different results.

Paging Dr. Sigmund Freud! Washington needs to see you.

• Chris Versace is the editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com or follow him on twitter @chrisjversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.