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The Federal Reserve Comes Clean

Posted by Larry Doyle on August 10, 2011 5:47 AM |

Federal Reserve System imagesHave you ever officially read a Federal Reserve statement?

Many market participants rip apart Fed statements within seconds of release looking for key words or phrases to decipher the path of future Fed policy.

Often reading a Fed statement is like reading a Tarot card as the ‘great and all powerful Fed’ provides sufficient obfuscation in order to cover a whole slew of bases.

Yesterday’s Federal Reserve statement struck me as far different from those in the past as it left very little to interpretation. The Fed came clean as it not only told us the economy is slowing but it very uncharacteristically put a time stamp on at least how long their ‘extended’ period of low interest rates will run.

No need for the Tarot cards as we navigate yesterday’s Federal Reserve Press Release

Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected.

Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.

The growth may be considerably slower than previously expected by the Fed but it has been totally consistent with the Sense on Cents view of a ‘walking pneumonia economy‘.

However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity.

The Fed is telling us right here that the real economy remains weak and that the weakness can not be ‘explained away’ by one time events such as the earthquake. I may not like the news but I do appreciate the truth.

Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.

Interesting how the spike in inflation coincided with the Fed’s quantitative easing program. Think the rioting overseas and cost pressures put on ordinary Americans unnerved Chairman Bernanke?

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased.

Right here, Ben is telling us our ‘walking pneumonia’ economic condition is going to persist. Look for more growth numbers consistent with the .4% and 1.3% (will this be revised lower?) reading seen on 1st and 2nd quarter GDP.

Risks to growth run to the downside meaning chances of a double-dip recession have just increased. That is if you believe that we have ever actually gotten out of recession. For more on that topic, perhaps you may care to review, The Recession Never Truly Ended.

The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

I read this as an indication that the deflationary and/or disinflationary forces at work in the economy have grown stronger while food and energy costs may no longer be increasing. In regard to those energy costs, I don’t know about you but I am still paying over $4.00 a gallon for regular gas.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

I have never witnessed and can never recall a Fed statement that so clearly pinpoints a time period for maintaining a Fed policy.

Ben and team are trying to provide greater transparency and clarity with this statement but it is a strong indication as to how deeply embedded our ‘walking pneumonia’ is in our economic lungs.

The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

Ben does not have many clubs left in his bag. Think of trying to hole out from 250 yards with a 3-wood. Do you have that kind of game? In looking at Ben Bernanke, can you picture him on the links? I am not so sure Ben has that kind of economic game either.

Remind you of anybody?

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

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