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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.

  • Matt Cornell

    Hi Larry –

    Question for you. Why do you think there is not more outrage from retirees over Ben Bernanke’s policies? This indefinite ZIRP policy is very damaging to retirees who must live on a fixed income. Is there outrage and we’re just not hearing it or seeing it? Is it because there really aren’t that many retirees (many are still working)? Is it because most retirees are living primarily (or solely) off Social Security? Is it because they feel like they are not able to change anything or make a difference through their protests? Or is it because most retirees have so much money they don’t care? I would think that even if they had a ton of money, they would still be upset by this policy. I am far from retirement, but this policy really upsets me because I feel like I’m being forced to invest in the stock market and I have absolutely no desire to be in this market right now.


    • LD


      The Fed policy and approach is akin to a phrase I have used previously, that is, “how long can you tread water”? People are being forced to jump onto assets in an attempt to keep them afloat but meanwhile the water level from the flood of debt continues to rise and is drowning our economy in the process.

      In regard to the retirees, I believe the following:

      There is real outrage but it is not being heard. Where is the AARP when you really need them?

      There are plenty of retirees and yes, many of them are very much dependent on that Social Security check.

      I have yet to see or hear a protest and I am not sure who their spokesmen are.

      It is not a function of most retirees having too much money, I can assure you. In fact, we know that many did not sufficiently save for retirement and used their homes as piggy banks. We know how that played out.

      Very challenging times for everybody with very few places to hide. I think you may want to look at some high dividend equities and high yield bonds but even there you need to truly dig into their businesses to make sure they are sound credits.

  • fred


    For the most part, I agree with your interpretation of the Fed release. However, left unsaid by the Fed is their 3rd mandate of maintaining the solvency of the global banking system.

    With bureacrats, (I consider Ben to be one), the ends always justify the means. At the end of the day, I don’t believe a bureacratic Fed cares about the human anguish and suffering caused by their policy.

    With this in mind, I believe that a specific reference to QE3 was ommitted, not because of human anguish, but because the dissenting votes within the Fed now represent 60% of the voting members; their concern, the increase of LT inflation expectations embedded within an extended weak $US policy.

    I agree with the disenters but for a different reason. Our pursuit of a weak $US puts our reserve currency status at risk, this in turn puts our right to self government at risk. We should never relinquish our right to self gov’t to global bureaucrats because they don’t have America’s best interest in mind.

    The other issue I have with the Fed is their focus on manipulating asset values, particularly the stock market.
    This is done not only by their policy actions but also through code words in their monthly meeting releases.

    Again, the ends are used to justify the means; with over 98% of pension and endowments having a long side bias.

    An old trading rule of thumb, buy dips above the 200 day moving average and sell rallies below. Alot of damage was done prior to the Fed meeting tnis week, look for Fed members to come out and try to talk this market higher to regain the 200 day average, otherwise the bears are clearly in control and will continue to take the market lower.

    • LD


      What you are hitting upon is the fact that there are consequences, unintended or otherwise to Fed policy and programs. Shifting the cost burden around is similar to reshuffling the deck chairs on the Titanic.

      Ben is trying to keep the ship afloat and there are lots of things he can do and has done. However, Ben is not Superman and he can not save the global financial system singlehandedly.

      I truly believe we are in the midst of a slow motion movie for the last three plus years but the speed of the film is increasing as the debts need to be rolled and the price of capital in selected sovereign nations increases.

      Keep your seat belt fastened…or perhaps I should write, keep your life preserver tightly strapped.

      • fred

        You use the Titanic in your analogy, does our ship also sink, ie. the recent images from the U.K. riots or deteriorate into class/generational warfare?

        I liken our situation to a powerful drug with side affects, Dr. Ben knows what the side effects are but is still willing to force us to swallow the pill. Using this analogy, how far are we into ‘One Flew over the Cuckoos Nest’? Is it too late to consider alternative treatments or has Jack already lost the gleam in his eyes and become a basket-case?

        • LD


          The Titanic is an overused analogy and perhaps I should not have used it but I do see the waters rising and overwhelming more segments of our economy.

          Some will be able to keep their heads above the line but regrettably others will not despite or perhaps because of Ben’s efforts.

  • Matt Cornell

    Great question on AARP Larry – where is AARP regarding the Fed’s ZIRP policy? My guess is their #1 priority is preventing Social Security reform and that’s their focus, but they should still be loudly lobbying against Bernanke’s announcement yesterday. How about the market this week! Doesn’t it remind you of October 2008?

    • LD


      The volatility is tremendous and the speed of the decline is breathtaking. I think this move may very well spook many retail investors out of the markets for a long time and potentially forever.

      The charts look like a classic head and shoulders move and would indicate that the market has another 10% downside.

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