The U.S. Federal Reserve continues to ignore the skyrocketing prices of food and energy in its assessment of current inflation. The core rate of inflation the Fed uses to calculate inflation excludes food and energy prices. Some worry these policies encourage the Fed to ignore continued economic challenges and high unemployment. See the following article from The Street for more on this.
The FOMC statement once again included language "the underlying (code for ‘core’ rate) rate of inflation is trending lower." This, of course, excludes just about everything important you use everyday–food and energy. In some places of the world there are food riots. Prices you’re seeing at your supermarket are beginning to sky. The Fed announcement Wednesday continues the policy of completing the purchase (monetizing) of more Treasury debt. Immediately after the announcement commodities rallied sharply as the Fed is giving them the green light.
The other interesting rationale is that economic growth is too slow and won’t generate jobs. Did QE1 produce jobs? Has QE2 generated jobs to date? No. U.S. companies may continue to create neat gadgets but they’re all being assembled/built overseas. Nothing in this policy will change that stubborn fact.
Naturally, a continuance of this policy also green lights more POMO and higher asset prices overall and could build another bubble that Bernanke & Co were blind to last time.
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As an owner of stocks and commodities you should be happy for now. But, the end result may not be pretty.
At the WSJ, Kelly Evans outlined well the Fed’s dilemma in The Fed’s Magic Show Appears to be Over (subscription required) as she states among other things: "History suggests any further easing probably would do too much for the stock market and asset prices, and too little for jobs."
At the ETF Digest we maintain some so-called Lazy Portfolios in addition to our more active models. In this environment, and until POMO ends and/or Bernanke & Co get eye surgery, the former will outperform the latter easily.
For a Fed Day volume was unusually light. The markets were ramped higher early and then camped until the non-decision. Breadth per the WSJ was quite positive.
This article has been republished from The Street. You can also view this article at The Street, a site covering financial news, commentary, analysis, ratings, business and investment content.