Tuesday, December 16, 2008

Fed will do whatever it takes

The Fed's statement today essentially confirmed that it is engaged in quantitative easing and will be so for "some time." It will do whatever it takes to "support the functioning of financial markets and stimulate the economy." With this sort of commitment by the Fed, the one thing you can be sure of is that deflation is not going to happen. The only question is how much inflation we'll have as we eventually emerge from this crisis: a lot or a little?

TIPS prices rose on the news, which is logical, since the risk of deflation (which had been the major factor depressing TIPS prices of late) has dropped with this announcement. The dollar was weak going into the announcement and has fallen further, which is logical, since the Fed is going to try very hard to pump more dollars into the market than the market probably desires. Gold was strong and only got stronger, which is logical since the risk of inflation has increased. Equities have been moving sideways for awhile but got a boost with the announcement, and that is logical since the risk of deflation/depression (which has been the major factor depressing equity prices of late) has fallen.

This is one of those times when reading the market tealeaves is not hard at all, and the message is clear: things are definitely going to be getting better.

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