Post by LWPD on Aug 9, 2011 18:24:14 GMT -5
To give the markets some sense of transparency, the Federal Reserve has pledged not to raise interest rates until at least 2013. All eyes now look to the 8/27 conference in Jackson Hole, WY, birthplace of QE2. In the period between 2008 to present, the Federal Government has borrowed and spent $6.1 trillion in new debt, resulting in $700 billion in total GDP "growth". Adjusted for inflation, it can be argued that there hasn't been any real growth in the U.S. economy in the last four years.
Courtesy of Financial Post
Fed locks in low rates
By Tim Shufelt
Facing a deteriorating economy, the U.S. Federal Reserve said Tuesday it would keep interest rates at record lows until at least 2013, putting a time frame on its monetary stimulus for the first time.
With a large contingent of investors clearly hoping for something far bolder, reaction to the Fed’s move became difficult to gauge amid erratic market swings. Dissent among the Fed’s policymakers — three members wanted no change to the Fed’s language — also riled the market.
Following the worst day on equity markets in almost three years, during which every single stock on the S&P 500 registered a loss, U.S stocks recorded the year’s biggest rally in advance of the Fed’s statement.
“They built in some pretty high expectations on the Fed,” said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets. “Something like QE3 is what the market is hoping for.”
Instead, Fed chairman Ben Bernanke took a cue from his Canadian counterpart by conditionally committing to exceptionally low rates at least through mid-2013, a course similar to that followed by Bank of Canada governor Mark Carney during the financial crisis.
“This was a relatively small move,” Mr. Chandler said, citing the immediate disappointment on stock markets in both Toronto and New York, where a fresh selloff erased the day’s gains and sent indices back into negative territory.
That was promptly followed, however, by a tremendous upswing, during which the Dow Jones Industrial average gained a staggering 635 points in barely more than an hour, ending the day up 4%. The TSX closed at 12,109, a gain of 3.8%, proving, if anything, that market volatility remains rampant.
However markets end up interpreting the rate guidance offered today by the Federal Open Market Committee, pressure to implement an additional bond-buying program is unlikely to abate.
The FOMC did seem to keep alive the possibility of resorting to such policy options, indicating it is “prepared to employ these tools as appropriate.”
There is some speculation that the Fed may hold off announcing new bond purchases until its Aug. 27 conference at Jackson Hole, Wyoming, where Mr. Bernanke last year first hinted at QE2. “They are running out of tools and they need to do something if things deteriorate further,” Mr. Chandler said. “But there’s no magic bullet at this stage.”
Mr. Bernanke has acknowledged that quantitative easing is successively less effective with each round. Additionally, part of the rationale for such stimulus is to ensure banks are liquid enough to lend. “Most companies have cash, it’s just that confidence is so low,” Ms. Sutton said. “That’s the scary part for the Fed.”
The recent rebound in inflation further weakens the case for quantitative easing, which, in part, is typically used to combat deflation. “What we have is a very weak economy, a fiscal problem in the U.S., a debt problem in Europe and, all in all, I’m not sure QE3 is the answer to any of that,” Ms. Sutton said.
The Fed acknowledged the global headwinds in Tuesday’s statement, in which the central bank divulged a sinking forecast for the coming quarters, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, D.C. “By pegging the extraordinary low interest rates to a date in the distant future, the Fed has essentially said that they see the current level of weakness lasting far longer than previously expected. Across the board, it was a pretty depressing view of the economy,” he said.
The FOMC statement also betrayed emerging discord within its membership, registering three votes against the rate action. “The statement reeks of a tense debate that divided the vote and gave rise to dissenters in the end, and the one bone that was tossed to those seeking action is irrelevant,” Derek Holt, an economist at Scotia Capital said in a note.
“That likely also says they’d be dead set against any further concrete actions by the Fed in the absence of meeting a very high bar for additional stimulus.”
Courtesy of Financial Post
Fed locks in low rates
By Tim Shufelt
Facing a deteriorating economy, the U.S. Federal Reserve said Tuesday it would keep interest rates at record lows until at least 2013, putting a time frame on its monetary stimulus for the first time.
With a large contingent of investors clearly hoping for something far bolder, reaction to the Fed’s move became difficult to gauge amid erratic market swings. Dissent among the Fed’s policymakers — three members wanted no change to the Fed’s language — also riled the market.
Following the worst day on equity markets in almost three years, during which every single stock on the S&P 500 registered a loss, U.S stocks recorded the year’s biggest rally in advance of the Fed’s statement.
“They built in some pretty high expectations on the Fed,” said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets. “Something like QE3 is what the market is hoping for.”
Instead, Fed chairman Ben Bernanke took a cue from his Canadian counterpart by conditionally committing to exceptionally low rates at least through mid-2013, a course similar to that followed by Bank of Canada governor Mark Carney during the financial crisis.
“This was a relatively small move,” Mr. Chandler said, citing the immediate disappointment on stock markets in both Toronto and New York, where a fresh selloff erased the day’s gains and sent indices back into negative territory.
That was promptly followed, however, by a tremendous upswing, during which the Dow Jones Industrial average gained a staggering 635 points in barely more than an hour, ending the day up 4%. The TSX closed at 12,109, a gain of 3.8%, proving, if anything, that market volatility remains rampant.
However markets end up interpreting the rate guidance offered today by the Federal Open Market Committee, pressure to implement an additional bond-buying program is unlikely to abate.
The FOMC did seem to keep alive the possibility of resorting to such policy options, indicating it is “prepared to employ these tools as appropriate.”
There is some speculation that the Fed may hold off announcing new bond purchases until its Aug. 27 conference at Jackson Hole, Wyoming, where Mr. Bernanke last year first hinted at QE2. “They are running out of tools and they need to do something if things deteriorate further,” Mr. Chandler said. “But there’s no magic bullet at this stage.”
Mr. Bernanke has acknowledged that quantitative easing is successively less effective with each round. Additionally, part of the rationale for such stimulus is to ensure banks are liquid enough to lend. “Most companies have cash, it’s just that confidence is so low,” Ms. Sutton said. “That’s the scary part for the Fed.”
The recent rebound in inflation further weakens the case for quantitative easing, which, in part, is typically used to combat deflation. “What we have is a very weak economy, a fiscal problem in the U.S., a debt problem in Europe and, all in all, I’m not sure QE3 is the answer to any of that,” Ms. Sutton said.
The Fed acknowledged the global headwinds in Tuesday’s statement, in which the central bank divulged a sinking forecast for the coming quarters, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, D.C. “By pegging the extraordinary low interest rates to a date in the distant future, the Fed has essentially said that they see the current level of weakness lasting far longer than previously expected. Across the board, it was a pretty depressing view of the economy,” he said.
The FOMC statement also betrayed emerging discord within its membership, registering three votes against the rate action. “The statement reeks of a tense debate that divided the vote and gave rise to dissenters in the end, and the one bone that was tossed to those seeking action is irrelevant,” Derek Holt, an economist at Scotia Capital said in a note.
“That likely also says they’d be dead set against any further concrete actions by the Fed in the absence of meeting a very high bar for additional stimulus.”
