Wednesday, November 3, 2010

Stay On Your Toes

A rather anticlimatic Fed announcement. In their usual obfuscated Fedspeak, the Fed attempted to give the markets the cake they wanted, and allowed them to eat it too.

$75 BILLION a month in QE2 'sounded like" less than the $100 BILLION market participants were expecting. BUT, when you add in the MBS income they were already using to buy debt, the number quickly clears the $100 BILLION threshold. [And we won't even consider the debt they are buying, the stealth QE, through the back door of the banks.]

Be wary of a rise in the Dollar DESPITE the QE2 announcement as the financial media is sure to spin the Republican House victory as a sign of a "new austerity" in America. All together now, "yeah, right..."

Until the dust settles on these election results, and this quibbling QE2 pronouncement, it may be wise for traders to stand aside for a brief time to see how this shakes out in the near-term. Long-term there is no question that the Precious Metals have much. much further to run up before this bull retires.

Keep an eye on the Asian currencies, the Yen and the Yuan. Gold rises with them, and falls with them as well. The Euro is playing the decoy.

Text of FOMC Statement:

Press Release

Release Date: November 3, 2010

For immediate release
Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. 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, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

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 for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.

Fed will spend $600B in latest bid to help economy
Federal Reserve to buy $600 billion in bonds, but whether it will help economy is in doubt
Jeannine Aversa, AP Economics Writer
WASHINGTON (AP) -- The Federal Reserve will sink $600 billion into government bonds in a bold plan that it hopes will drive interest rates even lower than they already are and start the chain reaction that finally creates jobs and invigorates the economy.

The Fed said Wednesday that it would buy the bonds at a rate of about $75 billion a month through the middle of next year. The idea is to encourage people to spend more money and stimulate hiring, both ways of accelerating economic growth.

The announcement helped push stocks, which have been rising for weeks in anticipation of such a move, to their highest close of the year. But the program was immediately met with worries that it would not help enough and could backfire by causing inflation, creating asset bubbles and further weakening the dollar.

Even some analysts who were not concerned about such a backlash said the plan was unlikely to do much good.

"Bottom line: The plan provides a boost to the economy's growth, but it is not going to solve our problems," said Mark Zandi, chief economist at Moody's Analytics. "Even with the Fed's action, we're going to feel uncomfortable about the economy in the next six to 12 months."

The announcement came a day after voters frustrated by persistent unemployment and the limp housing market handed control of the House to Republicans and gave the GOP a bigger voice in the Senate.

The split will probably make it harder for President Barack Obama to enact any major economic initiatives and could put more pressure on the Fed to get the economy back on firmer footing.

The program is smaller than what Fed policymakers called their "shock and awe" approach to fighting the 2008 financial crisis. At that time, the Fed bought $1.7 trillion worth of securities.

This new program, including money that the Fed plans to reinvest from the portfolio of mortgages it has bought, should ultimately total $850 billion to $900 billion.

I'm going to Disney World for a long weekend, and will return here early next week. For the very near-term, proceed with caution traders.

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