Author Topic: US Federal Cheat Sheet  (Read 260 times)

Offline kaki-besar

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US Federal Cheat Sheet
« on: August 10, 2011, 08:56:26 AM »
The Federal Reserve Statement caused stocks to plunge, gold to move higher, yields on US bonds to somehow drop even lower, crude oil to plunge, and the Swiss Franc to ramp up. In effect, traders responded to the statement by fleeing to any possible asset with a modicum of perceived safety.

Another round of Quantitative Easing isn't on the table. The Fed also added the following rather harrowing comments:

1. "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."

2. "Moreover, downside risks to the economic outlook have increased."

3. "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."

We already knew point #1. Since the Fed's last meeting in June, first-half GDP has been lowered, the "economic soft-patch" previously blamed largely on Japan has been acknowledged as a swamp, and Europe's debt disaster has continued to spread through the PIIGS. We've also had a disastrous debt ceiling debate and an downgrade by Standard & Poor's. So, yes, the state of the economic world has worsened since early summer.

Comment #2 regarding downside risk is somewhat knew but an obvious extension of statement #1. None of the above-mentioned situations is apt to turn around anytime soon. If ever.

The mention of the economy requiring stimulus through mid-2013 is new and it's negative. The Fed has given up on 2012. Within the noise of the rest of statement are comments about deterioration, depressed housing, and the implication that corporations will sit on cash, meaning jobs will be added to the economy slowly, at best. The Fed didn't say the word "recession" but what they did convey the idea that the economy is soft and the Fed knows it.

The Fed essentially announced they've done what they can. They have stimulated and will continue to keep rates effectively at zero, but not even they believe that's going to help. The Fed may not have conceded being out of bullets but it's irrelevant as they didn't even unsheathe their gun.

In effect, the Fed implied they have done what they can; the near-term fate of our economy is reliant on our elected officials. It's a prospect more troubling than anything actually in the FOMC Statement.