Yesterday the FOMC released their regular statement regarding policy and actions at 11:30 AM central time followed by an extended live Q&A with the Fed Chief, Bernanke. We feel the FOMC has made a mistake with their statement.
“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.”
As is often the case when we have a strong opinion, we have made it a point to not read the various analysis before voicing our thoughts.
Here are the reasons we feel this statement was a mistake:
- There was nothing gained by pushing the time line out another year right now. Keeping that statement in the hat for this time next year (if necessary) would have been a much safer way to go.
- It is too hard to predict what the economic situation is going to be that far in the future (We liked the original runway of time as it pushed any fed decision out-of-the-way of the election.)
- Investor confidence (domestic and more importantly internationally) is paramount in retaining control of US interest rates. In investment professionals minds, holding rates low until next year, no matter the economic situation was feasible. Extending the stated term another year slightly cheapens this statement AND their original statement of low rates until 2013.
“Hot on the Long End”
Ultimately what we will now even more closely watch for is longer termed bonds rates rising. In Wall Street lingo, it is called getting “hot on the long end.” Rates have a funny way of making officials and investors eat their words. The FOMC changing their minds in the future would not be the worst thing that has ever happened.
Have a Great Day!
PS We are not being Zaggers, but do call it as we see it !