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Well, it is now clear that
we’ve entered a new era of central bank policy making in which money
printing in both Europe and the U.S. has become open-ended, today’s policy
statement from the FOMC (Federal Open Market Committee) indicating that
the Federal Reserve will purchase some $40 billion in mortgage backed
securities until such time that the U.S. economy improves (that might be a
long time).
The Fed also extended its
promise to keep short-term interest rates at their freakishly low level of
between 0 and 0.25 percent from late-2014 until mid-2015, a decision that is
sure to thrill fixed income investors in the world who have already been
locked out of CD rates at or near the rate of inflation for years now.
As shown to the right where the
last two Fed rate cutting cycles are compared, we’re now at the five
year mark since the Bernanke Fed first began slashing interest rates in 2007,
about the same mark where rates had been normalized the last time around.
Moreover, if the current low
rates extend into 2015 as promised, that would put us beyond the end of the
last rate cut/normalization cycle, more fodder for future monetary historians
to be sure.
Probably the most important part
of this statement is the following in which money printing in excess of the
additional $40 billion per month is threatened:
If the outlook for the labor
market does not improve substantially, the Committee will continue its
purchases of agency mortgage-backed securities, undertake additional asset
purchases, and employ its other policy tools as appropriate until such
improvement is achieved in a context of price stability.
Not surprisingly, Richmond Fed
President Jeffrey Lacker once again dissented from
the other 11 voting members of the board and markets seem to be taking the
news quite well, stocks moving sharply higher and precious metals surging.
Curiously, the U.S. dollar index is unchanged and energy commodities are
slightly lower, so, maybe there’s more (or less) here than meets the
eye.
As always, the last two Fed
policy statements are shown below:
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