As Expected

News release from The Federal Reserve:

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.
Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.


As expected, the Fed has not yet announced quantitative easing, and has opted to keep their holdings of securities fairly constant.
The announcement has reassured markets for now.
The Fed continues to believe that the solution to the debt problem is more debt and to roll it forward.  

The lack of response in the economy may only become apparent to the Central Bank in September or October.  By then it is our view that QE will be taken out of the Fed's box of tricks.

The next two FOMC meeting dates are September 21 and November 3rd.  It is our opinion that the September meeting is key, as there will be political pressure from the Democrats to "revive" the markets before the November mid terms and deal with the consequences later.


  1. Even after all this negativity, S&P is still holding haven't had a major downturn as "experts" have been saying. How long will it take before this goes down and I start shorting or wait a second this looks like it might go up (for a short period) for a nice swing ($$) :-)


  2. Walter does raise an interesting point. The downturn for stocks has not developed to date quite in the manner expected. The market often behaves in unpredictable ways that seem divorced from fundamentals. If the Fed launches QE 2 in October as I expect, stocks may indeed rise accordingly. However, the time to short the market will come, and I remain bearish in the medium term for reasons I will explain in a future post.


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