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Fed Treadmill Continues

Posted by Larry Doyle on April 28, 2010 2:33 PM |

The Fed just released its regularly scheduled statement reviewing the economy and providing its outlook for monetary policy. What is interesting is not the report from the Fed but the market reaction, or lack thereof. Has the octane in the Fed’s fuel finally been exhausted? Is the engine running in reverse in the EU putting the brakes on the overall market?

The Fed provided a very qualified statement indicating that the economy is improving ever so slightly, that inflation pressures remain subdued, that employment prospects are beginning to improve, but that real slack remains in the overall economy. The Fed gave no hint that it is thinking of selling any assets (mortgages or agency debt). Add it all up and the Fed is in no hurry to make any change in its easy interest rate policy, that is a 0-.25% Fed Funds rate for an extended period.

Market reaction is very muted with barely any movement whatsoever. The treadmill continues in which the easy money from the Fed will allow the financial system to recover while the overall economy continues to adjust to lessened credit and meaningful employment improvements anytime soon. I view this as nothing more than a wealth transfer from savers to the banking system.

The crisis in the EU is clearly weighing on the Fed and I have no doubt that Bernanke is concerned about the fragility of our global economy.

One Fed governor did dissent. Kansas City Fed chief Thomas Hoenig believes the Fed needs to indicate that rates should move higher to prevent the prospects of an asset bubble and an eventual spike in inflation.

My take…the more things don’t change in the economy and with the Fed, the more they stay the same in the markets. Easy money will keep a floor under the markets, but under the easy money is an economic foundation built largely upon sand and enormous debts. That foundation needs real work.

LD

  • coe

    LD – If you think about it, isn’t it true that though housing price declines have slowed, we don’t seem to be anywhere close to an organic turnaround in prices recovering and ultimately rising? And isn’t it still quite a bit difficult to feel too sanguine about employment – tons of folks remain disconsolate and discouraged and to some extent those lucky enough to have reentered the work force have been forced to accept “underemployment”, or even have had to re-train themselves for a new job? And why would the Fed, sitting on a gazillion mortgages that are throwing off 4-5 points of positive spread vs miniscule short funding rates (talk about jawboning policy into an enormous “bank” carry trade) exit that position? Take a look at the fragility, as you call it, of the Euro zone and the impending contagiousness of the “debtor” status problems, and then let’s look in the American mirror clearly – i.e. without the political fog! Banks are not lending – demand is exceptionally weak for sure, and the regulators are still stiffening their spines regarding capital adequacy, liquidity, credit sensitivities, and the new bugaboo – impending interest rate risk (talk about hypocrisy when juxtaposed against the interest rate risk embedded in the government’s policy positions); It’s hard to sense that the consumer is fully buying in and back from a prolonged walkabout; Yet the equity markets desperately want to believe that profitability has rushed back in corporate America and that stocks will continue to rally. I’m no trained economist, but I’m afraid your concerns about sand and debt may be all too real! Toss in the political uncertainties and time bomb costs in many of the President’s pet programs to reengineer the American way of life, and it seems to me that adds yet another log or two to the fire. Yet, on the other hand, would another course of action be more constructive at this stage? There’s an old line in a song that goes something like, “It’s never easy and it’s never clear, just who’s to navigate and who’s to steer…” We should figure that out ASAP! Any thoughts?

  • LD

    Coe,

    Dan Fogelberg’s Hard to Say, provides a number of tacts we could take to a love now lost but once cherished. How are we supposed to assess the current state of our financial love affair?

    Tact #1: Is love truly forever? Then what happened? Is this what America is yearning for? Who and what went wrong? Was it our partners? Was it ourselves? Was it a combination of both? Lots of questions.

    Tact #2 : Why is divorce so expensive? Because it’s worth it!!

    Tact #3 : Love means never having to say “you’re sorry” and for those representatives from Goldman Sachs in front of Congress we certainly did not hear that phrase.

    Tact #4 : Love is blind….as are most Americans who do not understand the true nature of what has really gone on between Wall Street and Washington.

    Tact #5 : Has all of this pain and angst been nothing more than a Fatal Attraction with a cheap slut known as excess debt?

    Thanks for the prompt, you really got my juices going. Now back to the lyrics….

    Lucky at love
    Well, maybe so
    There’s still a lot of things you’ll
    never know
    Like why each time the sky begins
    to snow
    You cry…
    You’re faithful to her
    In your careless way
    So you miss her when she’s far away
    But every time you think you’ve
    got it straight
    You fall —
    You face the future with a weary
    past
    Those dreams you banked upon are
    fading fast
    You know you love her but it may
    not last, your fear —
    It’s never easy
    And it’s never clear
    Who’s to navigate
    And who’s to steer
    So you flounder drifting ever
    near the rocks.
    It’s hard to say where love
    went wrong
    It’s hard to say just when
    It’s hard to walk away from
    love
    It may never come again.
    You do your best to keep your
    hand in play
    And try to keep those lonesome
    blues at bay
    You think you’re winning but it’s
    hard to say sometimes.
    It’s hard to say where love
    went wrong
    It’s hard to say just when
    It’s hard to walk away from
    love
    It may never come again.
    Lucky at love
    Well, maybe so
    There’s still a lot of things you’ll
    never know
    Like why each time the sky begins
    to snow
    You cry…






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