FOMC Meeting Ends - No Change To Stance
Not surprisingly the FOMC meeting ended today without a lot of fanfare or policy change announcements. Our expectation for today was precisely what we got - an extension of time that "exceptionally low" interest rates will be maintained and a cautious eye towards the economy. Fed policy-makers began meeting earlier today as nervous financial markets waited for some sign that the central bank could stave off the possibility of a double-dip recession. However, the Fed was highly unlikely to act at this stage of the game and will wait until the Jackson Hole Economic Summit towards the end of the month to make any announcements or hits about further quantitative easing programs.
The problem is "The Bernake" is trapped between a rock and a hard place. Instituting another round of QE, or stimulus, programs is likely to increase inflationary pressures on the end consumer without actually doing much for the economy. On the other hand, the current trends of the data, clearly point to a recession by 2012.
Here are some highlights from the statement released today:
Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.
Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. (Note: This is due to increasing productivity to keep from hiring - not good for the economy)
Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity.
Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased.
The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.
The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.
The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.
The markets didn't like the lack of clarity or vision from the Fed announcement, again this is not a surprise to us, but it does tell you a lot about what the markets are ultimately looking for as they immediately sold off into negative territory. However, upon closer inspection of the last line the markets began to infer the Fed is willing institute further easing should the data pose weak enough. This is exactly the same game plan that was used last year. They want their next hit of stimulus and they want it bad and they are willing to game the Jackson Hole meeting early.
As we have stated - we expect a rally to the 1200-1250 area on the S&P 500 initially and will be recommending allocation changes at that time depending on what is occuring at that time. However, it is anyone's guess as to where the next crisis is going to pop up from so volatility will remain high and more market weakness could occur over the next couple of weeks. The Jackson Hole Economic Summit will be the next best opportunity for the Fed to do review policy and make adjustments as necessary.
Again, this is all purely hypothetical, however, with the pervasive weakness in the economy, further declines in the market and enough screaming from Wall Street there will be enough incentive to launch another program. The only real question will be the actual size and scope of the program.
The other option the Fed has at this point is to do nothing and let the markets and the economy run its course. In reality this is probably the best thing to do but it will possibly lead to unintended consequences such as another financial crises if a bank implodes along the way. The other clear certainty of this option is that Obama will lose the next election as the economy will certainly be in a recession at that time.
Either way the markets are going to be highly volatile. We recommend that investors stay on the sidelines for now and continue holding excess levels of fixed income and cash until the markets return to a more positive trend. Speculators can trade oversold conditions but rallies can fade quickly so this is not for the faint of heart.