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The Fed Speaks

Posted by Larry Doyle on February 18, 2009 2:53 PM |

Fed chairman Ben Bernanke spoke at the National Press Club this afternoon and offered revisions for the Fed’s economic statistics for 2009. What do the numbers mean? Here’s a recap:

— the Fed expects GDP for 2009 to end up between -.5% to -1.3%, revised from -.2% to +1.1%.  The Fed obviously is expecting a contraction in our economy for all of 2009 and further added it does not see much of a pickup in 2010.

— the Fed is setting a long term inflation target of 2% but does not expect to see a pickup in inflationary pressures for a protracted period. 

— increasing its expectation for the unemployment rate in 4th quarter of 2009 to 8.5% to 8.8%.

— the Fed has seen no indication of stability in residential housing markets in January 2009.

— some Fed governors have increased concerns about defaults and foreclosures in the commercial real estate markets.

— the Fed believes long term growth potential for GDP is 2.5% to 2.7%.

— the Fed realizes that at some point it will need to contract the growth in its balance sheet to mitigate chances of increased inflation.

What does all this mean?

In summary, the Fed is publicly acknowledging that the economic recession will be longer, deeper, and more painful. They are also offering that they are determined not to let deflation or the threat of deflation impede the economy.

I see no reason to rush into adding risk assets (equities or speculative credits) on the heels of this report. It is actually very interesting to see that some high profile individuals and institutions have actually been selling assets:

T. Boone Pickens
Pickens Reduces Energy Investments, Holdings Fall 97%

Warren Buffet
Berkshire Reduces J&J Stake, Turns to Fixed-Income

Harvard University
Harvard Retreated From U.S. Stocks as Market Tumbled


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