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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.


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