FOMC Statement: Fed on Autopilot, Will Reduce Buying Agency Paper

Wednesday, November 04, 2009

The Federal Reserve is set to continue its ZIRP (zero interest rate policy) until spring 2010. According to the statement released after the latest 2-day meeting of the Federal Open Market Committee (FOMC) the Fed kept its key interest rate unchanged at the level of 0% to 0.25%. While the Fed sees the economy picking up I stay with my opinion that US GDP is actually still contracting were it not for the unlimited spending on killing devices.

Ben Still Doesn't Get It
As all FOMC members voted for the continuation of doing nothing despite gold showing clearly that inflation will set in next year one can expect that inflation will surge next year to levels not seen since the 1970/80s.
Contradicting itself in one sentence I advise investors to be extremely cautious as the Fed is way too optimistic in seeing a recovery:
Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.
The cryptic FOMC statement sees at least that we certainly cannot talk about a Goldilocks economy anymore:
Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
Acknowledging declining consumer demand the Fed expects inflation to remain subdued:
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.
I am not sure that the gradual tightening of the Fed's purchase programs will achieve the wished result of higher ABS prices. According to the statement the Fed will slow its purchases:
To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.
Sorry, this statement is of little help for investors that want to find out whether the Fed will remain on its course of monetizing the debt or whether it may think about a real solution to fantasy security prices they pay because nobody else wants to buy these toxic assets.
Gold's surge today is a clear reminder that investors worldwide are wary about the future of the value of Federal Reserve Notes (FRN) and its potential purchasing power in the future.
Although this blog refrains to give actual investment advice I feel on the safe side to recommend precious metals again.


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