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Source: BCA Research

 

 

Last week, the Fed announced that it will engage in open ended purchases of mortgage securities as well as extend the forward guidance to mid-2015.

In addition, the statement included:

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.

In other words, the Fed will increase its rate of purchases if the employment market does not improve substantially. Also, the Fed did this at a time when long-term inflation expectations have been rising. This is quite different from QE2, and shows that Chairman Bernanke is willing to take risks with inflation expectations, which up to this point have been fairly well anchored. The Fed clearly exceeded financial markets’ expectations yesterday. Bernanke has sent a strong signal that ‘whatever it takes’ is not reserved for the ECB.

Bottom line: The Fed’s actions will extend the life of the liquidity-driven rally in pro-cyclical investments.

Category: Federal Reserve, Think Tank

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2 Responses to “FOMC Meeting: Risk-On!”

  1. Don’t fight the Fed! Short at your own risk!

  2. peachin says:

    The Fed’s action has only one purpose – to force congress to move… “I’ll put in $40 Bil @ month.until you move toward something like Simpson-Bowles.” Even if Romney wins and tries to replace Bernanke – it will take more than a few months. (Bernanke’s Term expires 1/1/14 = how does one dump a fed chairman? ) Let’s say with all the complications :

    The Fed is structured to remove the influence of politics from monetary policy. Accordingly, the president nominates candidates for the Board of Governors, but, once approved by the Senate, the governors are granted 14-year terms that can’t be cut short by the executive branch.

    Does Bernanke: have the most powerful “Gun” in Washington….. seems so.

    Hypothetically, $40 billion X 16 months = 1/2 $Trillion or will the republicans decide to take a fast and quick look at Simpson-Bowles….