I haven’t written anything about the markets in a very long time due to the experience in extreme boredom that they have become as of late. The election came and went and now that we are just ahead of the Holiday Season the apathy has hit monumental proportions. More significantly, what was the point of doing anything ahead of today’s Fed meeting? There wasn’t any and so nobody did.
Now that the announcement is out, I think in retrospect today will turn out to be a meaningful turning point. Not so much because of what they said, but because of where certain markets are and because of what they didn’t say. Let’s start with the latter point.
From the statement, we found out that the Fed is set to launch an unsterilized buying program of $85 billion per month ($40 billion in mortgage backed securities and $45 billion in treasuries). This part was widely flagged already. The more interesting part is the language in the text discussing how the Fed will essentially link their low rates to unemployment, with 6.5% being the threshold.
This is all within a text that attempts to portray a very benign and healthy economy, one described as having an improving labor market, a housing recovery and anchored inflation expectations. Sounds pretty good to me; so then why accelerate the aggressiveness of their radical money printing policy?
The answer is that the Fed realizes its policies haven’t worked and are convinced they need to do more and more to prove an academic point that man is indeed more powerful than nature. At first, they said a stock market rally would set a fire under the economy. That hasn’t worked. Then they said a new housing recovery would do it. Once again, nein. So now their answer is just print money like crazy and eventually it will work. Yes, they are insane, but we already knew that didn’t we.
Actions always speak louder than words and their actions demonstrate a deep concern for the real economy and an unspoken understanding that things are not going well underneath the layers of propaganda.
Now onto the second point. I think today will mark an important turning point in the markets not just because of what I wrote above, but because of where things stand.