Spectacular meltdowns in U.S. stock markets have investors panicking but unfortunately for everyone, the Federal Reserve can't — and shouldn't — do anything to prop up stocks, experts say.
The Fed recently wrapped up a $600 billion bond buyback program known as quantitative easing — QE2 in the press since it was the second round of such policy — with the aim of pumping up stock prices and fueling recovery.
The Fed could in theory buy back more assets from banks and inject more money into the stock market as part of a QE3, but the negative consequences of such policy, such as an even weaker dollar and higher food and energy prices, would offset the good.
|Fed Chair Ben Bernanke
(Getty Images photo)
In fact, experts say, the worst thing the Fed could do is launch a third round of bond buying.
"Interest rates are already low. There could be unintended consequences from more Fed stimulus," says Stephen Cucchiaro, chief investment officer with Windhaven Investment Management in Boston, CNNMoney reports.
"People ran from the dollar and that helped fuel energy inflation after QE2."
Whether it's a good thing or not, QE3 is coming anyway, other experts say.
"QE3 now seems unavoidable in the context of a widening output gap in H1, a broad-based stall of employment growth and forthcoming increasing drag from fiscal policy," according to a piece by the economic team at Nouriel Roubini's research firm, Roubini Global Economics, CNBC reports.
Buying more assets from banks may be a hard sell, Roubini's team admits, but core inflation indices — which are stripped of volatile food and energy prices and largely used for setting interest rates — remain steady, which supports the argument that the Fed has the capacity to intervene.
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