Buffett is No Bernanke

It was reported this morning that Warren Buffet’s Berkshire Hathaway is investing $5 billion in one of the worst-performing stocks of the year, Bank of America.  With the news, and the vote of confidence from one of our country’s best investors, the markets opened up over 1%, with most financials leading the charge. 

However, the euphoria barely lasted the morning as markets and investors are fixated on a speech by someone deemed more influential:  Ben Bernanke.  There are some high hopes that tomorrow he will announce something so fantastic to prevent our economy from diving into another recession.

There are not many tools left at his disposal, but we’ve listed them here along with the likelihood we think they will happen:

1. The Fed could say nothing about new measures.  This is possible and the markets would react with disappointment.  35%
2. The Fed could announce that they will allow the bonds they purchased to mature, and over time shrink their balance sheet.  This is possible, but more likely to happen as inflation picks up in the coming quarters / years.  15%
3. The Fed’s current stance is to maintain their holdings in bonds by reinvesting funds received from maturing bonds.  This will most likely remain the case, but Bernanke could announce a time period as he did for short-term rates last week.  As most of their purchases have been short-term treasuries and mortgage securities, a twist on this possibility would be an intention to buy longer-term bonds.  70% 
4. The Fed could increase their purchases in what would be deemed QE3 (Quantitative Easing 3).  Certainly possible, as Bernanke announced QE2 during this meeting one year ago, yet unlikely.  20%
5. The Fed could lower the interest rate paid on bank deposits even further, or even charge a fee for holding cash.  This forces the banks to put the money to use in loans or mortgages.  It could also result in banks passing on these fees to customers with the hope that companies will then be incentivized to put the cash to work.  Certainly possible and easy for the Fed to accomplish.  30%
6. The Fed could state a target inflation level or Price Level Targeting.  While this would provide an amazing amount of clarity, certainly for investors and corporations, this is unlikely to happen.  4%
7. The Fed could be aggressive and take some actions on banks that Congress couldn’t muster.  This is my out-of-the-blue case that no one expects, and is extremely unlikely.  1%

The main tools at the Fed’s disposal accomplish one or both of the following; actions will lower interest rates further, or incentivize entities (banks, corporations, money market / treasury investors) to put cash to work.  We are not convinced that lower interest rates will solve the issues, but anything that encourages / forces corporations or investors to put more money to work would help.