FOMC Statement – May 1, 2013

The FOMC statement was released by the Federal Reserve today (May 1, 2013), drawing little attention from the media and the markets.

The Fed will keep buying $40 billion per month in mortgage-backed securities, which is nothing more than a bailout for the banks.  The Fed will also keep buying $45 billion per month in long-term treasuries.  This, coupled with reinvesting principal payments, will add about $85 billion per month to the monetary base.  If this stays on track, it will be about $1 trillion over the period of one year.

All of this debt buying by the Fed has kept interest rates down.  The 10-year yield continues to stay down, which has also kept mortgage rates low.  I expect this to hold for a while, either until the Fed changes its policy in a different direction or we start to see serious worries about future price inflation.

The votes for the current policy have not changed.  Just as what happened for the last statement, all FOMC voting members voted in favor of the statement, with the lone exception of Esther George.

It is interesting to compare the current FOMC statement with the prior FOMC statement.  They are very similar, with the main exception being one sentence in the fourth paragraph.  In the most current statement, there is the following addition:

“The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.”

So while we will likely get more of the same, the Fed may adjust its so-called quantitative easing program.  The Fed could reduce its buying if it sees higher inflation or a better economy returning.  Or, scarily enough, if the Fed sees more weakness in the economy, it could actually decide to increase its already astounding pace of creating new money out of thin air.

So while we are already in unprecedented territory, the Fed has actually left open the door for even greater monetary “stimulus”.  I really don’t think Bernanke and company know what they are doing.  This is new to everyone.  The Fed is really boxing itself into a corner.  We will know that imminent danger is ahead when price inflation starts ticking up.  The Fed will eventually have to choose between a severe recession and saving the dollar.

While I expect the Fed to eventually save the dollar and stop the digital printing presses, we can never be absolutely certain.