FORTUNE -- The Federal Reserve may soon steal a catch phrase from Buzz Lightyear: To infinity and beyond.
The Federal Reserve is meeting this week, and it looks likely that Bernanke & Co. will announce that it will boost its latest bond buying effort, which has been dubbed QE Infinity. So called quantitative easing, which is what happens when a central bank buys its own country's debt, is supposed to drive down interest rates. And low interest rates are supposed to stimulate the economy.
But it hasn't quite worked out that way. The economy is indeed improving, but not nearly as fast as one might have expected given that Bernanke kicked off the first round of quantitative easing more than three years ago. Companies are indeed borrowing, taking advantage of the lower rates. So that part of the Fed's plan seems to be working.
The problem is that companies appear to be using that cheap money to pay off old debts, or just hoarding it, instead of spending it on new hires, building factories or other types of business investments, which is normally the way low-interest rates boost the economy.
The question is, why? Robert Buckland, the chief global equity strategist at Citigroup (C), has an interesting answer. In short, Bernanke is turning the stock market into the bond market, or at least it may be starting to feel that way.
One of Bernanke's hopes from quantitative easing is to push investors who normally would buy bonds and other less-risky assets into riskier assets, namely stocks. And that appears to be happening. The S&P 500, which is up nearly 13% this year, is performing much better than the actual economy. That's supposed to make us all feel better about the actual economy, and spend more money.
Unfortunately, Buckland says that pushing all those risk-averse bond investors into the stock market has a downside, too. Corporate executives get more risk-averse, too, not wanting to alienate their new more conservative investors. That's why they haven't been spending money on acquisitions or expansions.
It's an interesting argument, but I don't fully agree with it. If this was the case, you would see more CEOs returning cash to their shareholders. Instead, the amount of cash on corporate balance sheets has continued to grow. What's more, as my colleague Scott Cendrowski recently pointed out, despite talk of companies rushing to do shareholder payouts ahead of the fiscal cliff, dividends are not up that much.
Most CEOs are pretty confident people, and it would be hard to suddenly make them overwhelmingly afraid of risk. A new group of shareholders could throw out corporate management teams that they thought were taking on too much risk. But that would take time. And stocks have only truly become interesting to income investors within the last year or so. So if what Buckland describes is happening, it's probably only happening at the margin, which might matter, but isn't a great explanation why the economy is only producing 146,000 jobs, nearly three and a half years after the recession ended.
I think the reason companies aren't spending money is probably the obvious one - because executives think the economy will continue to be weak. That makes it harder to pin the weak recovery on Bernanke and his loose money policies. And it's less interesting than Buckland's theory, but that doesn't mean it's incorrect.
How low would stocks have to go to bring Ben Bernanke off the sidelines?
A 17% drop in the U.S. blue chips would probably suffice, say big fund managers surveyed this month by Bank of America Merrill Lynch.
The S&P 500 would have to hit 1100 to get the Fed buying more bonds to prop up domestic demand for goods and services, according to the survey of 265 managers overseeing nearly $800 MOREColin Barr - Jul 20, 2011 9:52 AM ET
Is it possible to cut government spending without sending the economy into another tailspin?
Now hardly seems like the time to find out – though try telling that to the tightening-minded Republicans in the House, led by the likes of Eric Cantor of Virginia (pictured at right).
Already a weak recovery appears to be on the verge of collapse. U.S. output limped ahead at a 1.9% clip in the first quarter. The Federal Reserve, not exactly MOREColin Barr - Jun 24, 2011 1:57 PM ET
A Greek default would deliver a "very small" hit to U.S. banks, Fed chief Ben Bernanke said Thursday.
Bernanke, speaking in Washington at a Federal Reserve press conference, said the central bank has been "doing all we can to monitor the situation" in Greece, where the markets have been acting as if a default by the cash-strapped country is inevitable.
A Greek default would be the biggest global financial shock since the fall of MOREColin Barr - Jun 22, 2011 3:04 PM ET
Don't blame the Fed for $100 oil.
That's Ben Bernanke's message at the International Monetary Conference in Atlanta Tuesday. Bernanke said little about the outlook for Fed policy, other than to say he'll need to see "a sustained period of stronger job creation" to believe the economic recovery is fully under way. Join the crowd on that one.
So, surprise surprise, the Federal Reserve will be keeping interest rates low and its balance MOREColin Barr - Jun 7, 2011 4:00 PM ET
QE2 is almost over. Our long economic nightmare? Not so much.
That's one reason for Wednesday's market rout. Stocks tumbled more than 2% and the yield on the 10-year Treasury note closed below 3% for the first time in six months. Yes, the euro crisis is unnerving, and there are more and more signs around the globe lately that growth doesn't come free.
But there's a bigger problem: It is starting to MOREColin Barr - Jun 2, 2011 6:37 AM ET
What do surging bond prices and tumbling bank stocks tell us about the economy?
Nothing good, posits Gluskin Sheff economist David Rosenberg. He notes that over the past two months, with the stock market pushing toward its highs, the KBW bank stocks index has tumbled 12%, while 10-year Treasury yields have dropped 40 basis points to a recent 3.17%.
He says the last time these three things happened at the same time was in MOREColin Barr - May 12, 2011 10:52 AM ET
It's early yet to lose sleep over the job market's one-step-forward, one-step-back routine. Even so, the latest pivot is eye-opening.
A government report out Thursday showed initial claims for unemployment insurance rose 10% from the previous week to an eight-month high. Because the number is weekly, economists tend to take initial claims with a light sprinkling of salt – particularly in a week featuring tornadoes and Japan-related auto industry bottlenecks.
Even so, a look MOREColin Barr - May 5, 2011 11:33 AM ET
No one ever said playing the commodities markets would make it easier to sleep at night.
The ferocious silver selloff went into its fourth day Wednesday, taking the poor man's precious metal almost 20% off last week's post-Hunt brothers peak. Those who bought silver in January are still ahead by 30% or so -- but they surely aren't the only ones getting a little nervous.
The question now is whether those who MOREColin Barr - May 4, 2011 11:43 AM ET
For a guy who supposedly has lost all credibility, Ben Bernanke commands quite an audience. Too bad nothing he says can brighten a bleak economic outlook.
Europe is on the brink of financial collapse, oil could be headed for a repeat of its 2008 spike and the fiscally unfit United States is in danger of getting downgraded.
Yet what everyone wants to talk about this week is the Federal Reserve's plan to, MOREColin Barr - Apr 27, 2011 6:16 AM ET
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