The main news on the docket today was an earlier than usual FOMC (Federal Open Market Committee) meeting ahead of a Ben Bernanke speaking appearance. The first headline as always is the what the Fed decides to do with interest rates.... and as usual the answer is nothing; they will keep them near zero. But the Fed announcements still hold meaning, as the language used in the release is scrutinized in search of any indication of future Fed policy decisions. One of the key things investors look for is any sort of tip off on whether or not the Fed intends to do quantitative easing. Quantitative easing(QE) is when the Fed goes out and buys up U.S. treasuries (longer dated, which in turn makes their yields lower). With lower rates, theoretically, it becomes cheaper to finance various purchasing/business activities, thus making Q.E. stimulative for the economy. The purchasing of these securities requires money printing, which is potentially inflationary.
There was no explicit mention that QE would be used, but 'mid 2013' was explicitly used as the earliest time the Fed could see an interest rate environment not marked by extremely low rates (ie they're not raising rates for a long time). A low interest rate environment forces people to put money into riskier assets to get a return, which is stimulative. The real world sad implication of this is that grandma, who retired with enough money to rely on a fixed income, is now forced to take riskier bets to get the same returns she would've pre-near zero interest rates. The Fed continued to remain tempered on their description of the economy's progress, which some view as an indication that they have not taken using QE as a tool off the table. Also, for the first time, a Fed governor dissented with the Fed decision from the Dovish side (saying that the Fed should be more accommodating in its monetary policy). In the past there have been dissents saying that the Fed needed to raise interest rates, but this dovish dissent is an encouraging sign that QE may still be used in the case of a stalling economy.
The Fed reiterated its commitment to reinvest the interest from the asset backed securities it holds. In the Q&A Big Ben stated that inevitably the goal is to have the fed balance sheet with treasury securities only (not asset backed securities). Currently however the Fed invests in these asset backed securities (more specifically mortgage backed securities) because it helps aid the struggling housing market. The focus on the housing market makes sense, because it is the driver of so many jobs. Think about all of the jobs created from home building. Building a house requires material companies to obtain the necessary materials, construction workers to build, architects to design, interior designers to design, banks to provide financing, and inevitably workers to help with the upkeep (I'm sure I'm missing plenty of other jobs). The problem is that the housing market was a bubble. Is it prudent to try to "restore" the housing market, when you would simply be restoring a bubble? We are trying to grow our way out of the situation, and hence it is necessary to have the job- producing housing market healthy. At the same time, it is critical to realize the catch 22 that we face with respect to balancing overextending the housing market, and keeping it churning to boost employment. Tough job Mr. Bernanke, I certainly don't envy the task in front of you.
Europe:
Yesterday, the Greek Prime Minister reneged on his parliament's vote for an austerity package that would appease and guarantee temporary funding from the EU. Stating that the vote would be put to a public referendum (let the people decide). I had suggested that the only explanation I could think of, was that he was using this as a temporary appeasement to the Greek people so that they would not squash him in this Friday's vote of confidence. Since the referendum wouldn't be for months, he could gain the vote of confidence, and then renege on his people the same way he did on the EU. But Ah! The EU did something intelligent! Dow Jones just reported that the EU told Greece that they would not receive any funding until the referendum vote took place. So, if my suggestion was indeed the prime minister's intent, he will now have to win confidence without money guaranteed....no easy task. I won't even venture a guess on how or when this will come to a head, but it is an extremely critical point, and one that I think is not being talked about nearly enough (today at least). If Greece were to overturn its parliament-passed (easily passed by the way) austerity package, then default would be back on the table. Were that to be the case, mama Merkel's crafty move to ensure the Greek Credit Default Swaps weren't triggered would be in jeopardy. That scenario would be nothing short of explosive.
No comments:
Post a Comment