Don’t forget the Fed in 2013

As we approach the New Year, there are numerous end-of-the-year projections floating about concerning the direction of the market and the general economy for 2013, and I have been a little surprised that several of them fail to mention the Federal Reserve as a key part of what lies ahead.

No matter your position on monetary policy or economics, I don’t think it’s wise to discount recent Fed announcements that indicate continued quantitative easing. While it is not a new policy – the Fed’s balance sheet has been expanding for several years now – the recent announcements seem to indicate that the Fed’s focus for the coming year has shifted. Officials are so unconcerned with the prospect of inflation that they are now citing hard targets for unemployment and have indicated that the Fed’s policy of expanding the money supply will continue unabated into the foreseeable future.

Over and against the dour economic forecasts for 2013, the central bank’s actions could prop up stock market values longer than some bearish scenarios anticipate.

Personally, I feel that this is a suckers’ market; however, you can’t just rely on fundamentals. Not in my lifetime has the Federal Reserve been such an active force in the valuation of so-called “risk-on” assets, and it would be foolish to suppose that the fundamentals will suddenly take precedence over the Fed’s policies. It hasn’t happened over the past 36 months, and one has to assume that the U.S. central bank will continue bolster values in 2013.

Still, one also should not assume that the Fed’s current stance is carved in stone. I believe the Fed can and will reverse policy very quickly if there is any evidence of rising employment and wages, especially as these translate into inflationary pressures over time.

So, if there is one key variable to consider this coming year, it is jobs/wages. Until we get data indicating movement on this front, I think 2013 will see the continuing tug-of-war between the Fed’s expansion and the weak fundamentals of the underlying market.