The long awaited FOMC announcement came and it didn’t disappoint investors. The general consensus was that the Fed would begin to “taper” its purchases of assets, even if mildly. Instead, the Fed will continue to increase the monetary base by $85 billion per month, which equals out to just over $1 trillion on an annual basis.
You can read the September 2013 statement here.
For comparison, you can read the July 2013 statement here.
Over the last several FOMC meetings, we have seen very little in the way of changes in the statements released. In comparing some of them, they read almost word for word, with very slight changes. While this latest statement was still similar, there was additional language added in justifying the continued asset purchases and to say that they will continue to assess the situation in terms of when to scale back.
The key part of the latest statement reads as follows:
“Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.”
The statement did not mention that this would continue to bail out the banks.
As soon as this news hit the wire, stocks shot up. Gold and bonds did even better. It seemed that the only long position that did poorly after the announcement was the U.S. dollar.
I am not sure how long this whole thing can be sustained. This policy is a total disaster. I really believe that these policymakers are in over their heads at this point. This continuation of massive monetary inflation means that wealth will continue to be redistributed. It means that resources will continue to be misallocated. It means bubbles and future busts. It means a greater likelihood of high price inflation in the future. It means that when the eventual recession/ depression does hit, it will be that much more painful.
I will continue to revisit this subject, as it seems that the whole economy is predicated on Fed policy at this point. Unfortunately, almost everything the Fed is doing is wrong, at least for the average American. We will be poorer because of this.