Wednesday, September 23, 2009

FOMC wimps out again

Not surprisingly, the Fed continued to ignore the value of the dollar, and it fell in the wake of the FOMC announcement today. The Fed did acknowledge that the economy is picking up, however. But despite all the encouraging signs out there, they will continue with their plan to buy over a trillion dollars of mortgage-backed securities, albeit at a somewhat slower pace.

So the market continues to bid up stocks, since the outlook is less grim than previously thought, and continues to bid up Treasuries, since the Fed has given no indication that it will raise short-term interest rates anytime soon. The Fed's promise to keep rates low for a long time, coupled with the steepness of the yield curve, is a powerful incentive for the market to buy 10-year Treasuries, even if easy money and a weaker dollar continue to fuel inflation pressures.

5 comments:

Jay Norman said...

Scott:
Excuse my paranoia,but would you be concerned that China Fund is changing auditors. Or to the best of your knowledge is this something that happens.
As always, thanks

Jay

Scott Grannis said...

I don't see that as a problem. Funds change auditors all the time.

W.E. Heasley, CLU, LUTCF said...

In John B. Taylors book Getting Off Track he explains the easy money bubble created by violating the Taylor Rule and holding interest rates too low 2002-2004.

The Fed is creating another easy money bubble. This time around rather than a housing bust we get demand pull inflation due to easy money?

Scott Grannis said...

So far it looks like the Fed is again making the mistake of keeping rates too low for too long. Where the next bubble will be is hard to say however. As I look around for things that are "overpriced" or "expensive" relative to their long-term trends, about the only thing that catches my eye is gold. Gold is very vulnerable to a Fed tightening. But until they do tighten it will likely continue to rise.

W.E. Heasley, CLU, LUTCF said...

Good point.

The simultaneous deployment of the theory of QE and the theory of Keynesian Government Deficit Spending, in a Hyper-Debt environment, creates uncharted inflation waters. As you well know, those two theories were developed in low or zero existing debt.

It will be interesting to see where inflation raises its ugly head.