Let’s blow off the Fed today
The short story from the Fed is this…“nothing has changed.” Fed Funds will stay where it is and they continue to see the rate staying “exceptionally low for an extended period.” They will also continue the QE2 program as originally announced. By all rights today’s Fed statement should have sparked a rally in the Treasury market. Ironically…the market sold off a bit more.
There is nothing new in today’s statement…it basically provides a short list of modest positives and then offsets each of them with a longer list of significant negatives. See if you can find something in the following statements from today’s release that gets you fired up on the economy:
- “…recovery is continuing, though at a rate that has been insufficient to bring down unemployment”
- “household spending increasing at moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.” This one might be my favorite part of the statement…it’s like someone saying you’re kind of nice, but ugly, boring, short tempered and vain at the same time. This is not glowing praise for the economy.
- “business spending on equipment and software rising, though less rapidly than earlier in the year.”
- “Long term inflation expectations remain stable but measures of underlying inflation have continued to trend downward.”
This is a pretty dim report on the economy that offers no light at the end of the tunnel.
The Fed has two jobs: maximize employment and keep inflation in check. They are nowhere close to achieving either of those goals currently. As they look ahead they don’t see that they will be close to those goals anytime soon.
Going forward the Fed will keep rates at zero and they will continue the QE2 purchase program.
Frustration ahead for the Fed
So far the Fed has gotten nothing they wanted from the QE2 program. We are at a point where the Fed sees the economy still in a bad spot…but they now have borrowing costs rising. This will undoubtedly be viewed by the Fed as a threat that will choke off what little headway the recovery has. To their end they’ve said they will continue the QE2 program…but given the results they’ve had so far with QE2 it wouldn’t surprise me to see them try to pull another rabbit out of their hat. I have no idea what it might be…but I know they can’t be watching borrowing costs rising without wringing their collective hands.
If you have any questions on this material just let me know.
Posts
No comments:
Post a Comment