I received an email yesterday asking what it meant when the media said the Fed is “pushing on a string.”

The phrase refers to the ineffectiveness of central bank policy.  The Fed has flooded the financial system with capital, but the banks are not lending and the money supply remains stagnant.  In other words, the Fed’s actions (keeping interest rates low) are not moving through the banking system and to the real economy.  Consequently, economic growth is not accelerating at a speed that the Fed hoped for.

Like a string, the Fed’s pushing on their end is not producing forward movement on the other end.  Even if the Fed engages in another round of quantitative easing (see last week’s post), the impact is likely to be limited.  This is because it is the lack of confidence that is preventing economic activity, not the cost of capital.

You see, the Fed’s low-interest-rate policy affects the private economy only indirectly.  It still takes banks willing to lend money to businesses or individuals.  At the same time, those same businesses and individuals must also have a desire to borrow and spend.  The confidence of all of the above parties just isn’t there.  Until we gain some clarity on fiscal policy from Washington, I don’t expect much to change.

Confidence is the key force behind recessions – its absence brings them on, its renewal ends them.

Peter Lazaroff, Investment Analyst

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