Fed’s current strategy of buying long-term securities and selling short-term is ineffective. Further policy accommodation is warranted, and the fed will expand purchases of securities while extending the current federal funds rate and:
- The Fed will purchase 40 billion dollars a month of mortgage backed securities, which will be in an increase in holdings of long term securities of about 85 billion dollars a month till 2013
- The goal is to increase downward pressure on mortgage rates and long term rates in general, providing support to the housing sector by encouraging home purchases and refinancing
- If the Fed does not see improvements in economic and financial developments in the upcoming months they will continue purchasing MBS as well as additional asset purchases as appropriate, called unlimited quantitative easing
- The Fed will continue to control prices but is focused on unemployment
- Policy will continue passed recovery, to provide assurance to households and businesses, the target rates are 0% to 0.25% through mid-2015
- Projecting unemployment rates of 6.0 – 6.8 by 4th quarter 2015
- Projected inflation of 2% a year
- Fed earnings are remitted to the treasury and will help reduce federal deficit and debt
With that news, the DOW was up 206.51, 1.55%, to 13,539.86, S&P up 23.43 or 1.63% to 1,459.99. Overnight, Dow and S&P futures gained 63.00 points and 7.25 points respectively. Crude oil futures are up 1.79% to 100.07. Yesterday before the announcement, our trade pick at KOTM was to purchase a call fly on GLD, a Gold ETF. After the 12 pm announcement, GLD rose 3.41 points, a 2.03% gain, and continued to gain points overnight up another 0.44 points. As the policies around the world try to keep up with the Fed announcement, investors will be looking for stable currency. I am expecting buyers to continue pushing Gold prices up, and GLD to move up into a range of 174.00 to 178.00 and higher by 2013.
What happens if Fed policy fails? Bernanke explicitly stated that the Fed will continue its easing until employment gets better, with no real time frame. At some point, if unemployment and GDP are not improving, uncertainty about whether or not the Fed can effectively change the economy will make for a strong bear market. Don’t lose sight of the Fed’s progress over the next twelve months.
Alex Kalish has a master’s in economics from Suffolk University.
Comments, suggestions, and questions welcome: alexk@keeneonthemarket.com.
