The FOMC has released its latest statement. Nothing much has changed from its previous statement. The Fed will continue to buy $40 billion in mortgage-backed securities per month and $45 billion in longer-term treasuries per month.
If the Fed follows through with these statements, then it will mean an additional $85 billion per month will be added to the adjusted monetary base. The FOMC statement says that it is maintaining its policy of rolling over the maturing debt, including the mortgage-backed securities. In other words, it will not allow expiring debt to decrease the monetary base at all. It will keep reinvesting the principal amounts, while adding an additional $85 billion per month to its holdings. Over the course of a year, this will add up to about $1 trillion.
The FOMC announcement came in the afternoon, which was preceded that morning by news that the 4th quarter GDP in 2012 (annualized) is being estimated at negative 0.1%. So with all of the talk about seeing signs of improvement in the economy, there was actually a slight retraction in the last quarter. While I have my issues with the GDP as an indicator of economic growth, there is some validity to it. It is quite telling that the politicians can’t even get their own statistics to tell a positive story at this point.
The FOMC statement also said that it would keep the federal funds rate at between 0 and a quarter of a percent. This is basically meaningless, especially when commercial banks are sitting on huge piles of excess reserves.
The new GDP estimate is actually being taken as some as good news, because it means that the Fed will keep pumping new money. Of course, these people have their heads screwed on the wrong way, at least when it comes to economics. The continuation of Fed pumping means that they are kicking the can down the road further. It is delaying the inevitable and making it worse. It is allowing the government to spend vastly more than it could without the Fed’s help. This higher spending is misallocating resources and hurting savings and production. It is making us all poorer.
Since the Fed’s policies are unlikely to change any time soon, we can expect more monetary inflation. While it is impossible to know how long this will take to lead to significantly higher consumer prices, it will happen eventually if the Fed doesn’t stop. There will also be asset bubbles. This could be stocks, real estate, oil, or gold. It could be all of them. I think gold investments are the safest bet right now, but some exposure to all of these assets may not be a bad idea at this point.