The Federal Reserve has kept the short rate near zero and has had quantitative easing in place for five years now. Current Fed Chair Ben Bernanke has stated that any decision to begin tapering or raising rates will be data-dependent. This means they want to see strong economic growth for a sustained period and the unemployment rate at 6.5%. With Janet Yellen, the probable successor of Ben Bernanke, saying earlier this week that the real unemployment number is closer to 10% if you count those who have left the job pool, you have to wonder: What else can the Fed do?

he answer cannot be to continue QE indefinitely. It may have helped in the beginning, but it has been 5 years and at this point I believe any positives from QE are psychological. It is also very possible QE is having the exact opposite effect it was intended to have. It may be preventing the economy from really heating up. When the consensus was that the Fed would start tapering in September, the stock market reacted negatively, dropping approximately 7% and the 10-year Treasury rate spiked. This was just on speculation that the Fed might slow its bond-buying program. If they actually did decide to start tapering, we would probably see a similar reaction, only the stock market would drop further than 7% and interest rates would spike even higher. If this were to happen, I would view it as a positive.

What the Fed Can Do

I think the Fed does have some ammunition left. They could start tapering sooner rather than later, possibly at their next meeting in December. Yes, it would most likely cause the market to correct 10% or even slightly more, but we are overdue for that type of correction anyway. It has been a year since we have seen that type of downward movement in the stock market. Last November, stocks dropped 9% before quickly recovering. This year we have experienced small dips ranging from 3%-7%, but they happened so quickly and the market has gone on to hit all-time highs. So, a real correction would be normal, healthy and present a buying opportunity for long-term

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