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The Federal Open Market Committee, the policymaking arm of the Federal Reserve, released their policy statement for January, and it suggests additional monetary accommodation in the years ahead. In fact, it forsees maintaining the extraordinarily low federal funds rate of between 0 and 1/4% until at least the end of 2014. This means that the recovery remains fragile and requires additional monetary aid.
The Fed saw “some slowing in global growth” since its last meeting in December, as well as an elevated unemployment rate in the US, a depressed housing sector and slower growth in business investment. They see a lot of downside risks to the economy, due to “strains in global financial markets,” particularly in Europe. But the main point is that the Fed has a dual mandate on unemployment and inflation, and they see themselves missing both targets – unemployment will be too high and inflation will “run at levels at or below” their mandate. Thus the need for monetary accommodation.
They actually lowered their estimates for GDP growth in 2012, but also lowered their estimates on unemployment. The Fed now sees unemployment between 8.2 to 8.5% by the end of the year. I think we can make sense of this by saying that the Fed does not expect the low labor force participation rate to grow in the coming year. The current 8.5% unemployment rate comes in large measure from that low labor force participation rate, and if it grew, you’d see a higher rate of unemployment.
Here’s the key section of the release:
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies 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. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.
This was a nearly unanimous vote, and it sets the stage for a QEIII down the road. But I wouldn’t call that policy boldness so much as policy necessity.
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A 2% inflation target is a recipe for more of same.
Free money for banks, nothings for savers and retirees, and a gift to the gold bugs.
Exactly what I was thinking – punish savers and force money into the stock market. And hasn’t THAT worked out well for us – particularly those who’s retirement is based upon a 401K?
Worst. Policies. Ever.
The real reason the phoney FED is keeping interest rates low? Check out this article from seeking Alpha from February of this year. Here’s an excerpt:
“”"”Of course, Bernanke tells the public and Congress that the reason we need low interest rates is to support housing prices. He doesn’t mention that $188 TRILLION of the $223 TRILLION in notional value of derivatives sitting on the Big Banks’ balance sheets is related to interest rates.
Yes, $188 TRILLION. That’s thirteen times the US’ entire GDP, and nearly four times WORLD GDP.
Now, of course, not ALL of this money is “at risk,” since the same derivatives can be traded/spread out dozens of ways by different banks as a means of dispersing risk.
However, given the amount of money at stake, if even 4% of this money is “at risk” and 10% of that 4% goes wrong, you’ve wiped out ALL of the equity at the top five banks.
Put another way, Bank of America (BAC), JP Morgan (JPM), Goldman (GS), and Citibank (C) would CEASE to exist.
If you think that I’m making this up or that Bernanke doesn’t know about this, consider that his predecessor, Alan Greenspan, knew as early as 1999 that the derivative market, if forced into the open and through a public clearing house, would “implode” the market. This is DOCUMENTED. And you better believe Greenspan told Bernanke this.
In this light, all of Bernanke’s monetary policies and efforts are focused on doing one thing and one thing only: trying to shore up the overleveraged, derivative-riddled balance sheets of the Too Big to Fails, or Too Bloated to Exist, as I like to call them.
The fact that the bank executives taking this money and using it to pay themselves and their employees record bonuses only confirms that these folks have NO interest in taking care of shareholders or their businesses. They’re just going to take the money and run for as long as this scheme works.
I don’t know when this will come unraveled. But it WILL. At some point the $600+ TRILLION behemoth that is the derivatives market will implode again. When it does, no amount of money printing will save the Too Bloated To Exist banks’ balance sheets.
At that point, it’s game over for Wall Street and the Fed.”"”"
Source: Seeking ALpha
Derivatives: The Real Reason Bernanke Funnels Trillions Into Wall Street Banks
50 comments | by: Graham Summers February 8, 2011 | includes: BAC, C, GS, HBC, JPM
We’ve been over the numerous BS excuses that US Dollar destroyer extraordinaire Ben Bernanke has made for QE enough times that today I’d rather simply focus on the REAL reason he continues to funnel TRILLIONS of Dollars into the Wall Street Banks.
I’ve written this analysis before. But given the enormity of what it entails, it’s worth repeating. The following paragraphs are the REAL reason Bernanke does what he does no matter what any other media outlet, book, investment expert, or guru tell you.
Bernanke is printing money and funneling it into the Wall Street banks for one reason and one reason only. That reason is: DERIVATIVES.
According to the Office of the Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activities for the Second Quarter 2010 (most recent), the notional value of derivatives held by U.S. commercial banks is around $223.4 TRILLION.
Five banks account for 95% of this. Can you guess which five?