Why Fed Can't Save Economy, Or Markets 'On Its Own'

By Jeff Cox, CNBC.com Senior Writer

NEW YORK (CNBC) -- While some Washington leaders demanded Tuesday that the Federal Reserve come through with more stimulus, the reality could be that it has run out of ways it can help.

Fed Chairman Ben Bernanke gave his annual address to Congress on Tuesday and encouraged lawmakers to resolve their fiscal differences.

Instead, he faced challenges from some -- in particular New York Democrat Charles Schumer -- who want more central bank action. Schumer called the Fed "the only game in town" because of Washington gridlock and urged Bernanke to "get to work."

But with the Fed already holding interest rates near zero, American corporations and banks awash in cash and the central bank's balance sheet near $3 trillion, the Capitol Hill stalemate over deficit reduction looms as the economy's much bigger obstacle.

"Nothing is being done to promote the real economy and that's the real issue," Mohamed El-Erian, CEO at bond giant Pimco, told CNBC's "Squawk Box" program. "I feel sorry for Bernanke because the data is telling him he should be more active but there's a recognition that his policies are less effective."

Investors have thus been forced to face a twin threat -- 1), that the Fed may not enact a third round of asset purchases known as quantitative easing, and 2) that even if it does, the move likely will provide no more than temporary relief to the wavering economy.

"This is really important for the markets," El-Erian said. "The market should not bet on an outcome that the Fed cannot deliver on its own."

Yet there were traders Tuesday, ignoring a decent round of morning earnings reports and a blowout surge in sentiment from the National Home Builders Association.