The Federal Reserve released its much anticipated statement on the economy this afternoon. What did we learn? Let me provide a synopsis of Bloomberg’s coverage of the U.S. Federal Open Market Committee June 24 Statement:
» Conditions in financial markets have generally improved in recent months.
» Household spending has shown further signs of stabilizing
» Businesses appear to be making progress in bringing inventory stocks into better alignment with sales.
» the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustained economic growth in a context of price stability.
» substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.
» household spending remains constrained by ongoing job losses, lower housing wealth and tight credit.
» businesses are cutting back on fixed investment and staffing
» economic activity is likely to remain weak for a time
» prices of energy and other commodities have risen of late
In typical fashion, the Fed has attempted to cover all the bases and calm the markets. Were they successful? Not really. Why? The Fed remains between a rock (an exceptionally weak economy) and a hard place (providing excessive stimulus which will exacerbate fears of inflation given the explosion of the Fed’s balance sheet). The Bernanke Conundrum remains very much in place.
How have markets reacted to the Fed statement?
» Bonds have sold off as the market was hoping the Fed may have provided a pleasant surprise in the form of an increase in its quantitative easing. With the selloff in bonds, interest rates moved higher by approximately 10 basis points (1 basis point is .01%) and the 10yr U.S. Treasury is now quoted at 3.7%.
» Equities also sold off with the DJIA and S&P 500 both retracing by approximately 1% after the Fed’s statement. The Nasdaq has held up given positive earnings from Oracle.
What does it all mean?
Sense on cents believes interest rates will continue to work their way higher given the overwhelming funding needs for the foreseeable future (remember our funding needs this year are projected to be $3.2 TRILLION, a mere quadrupling of the last few years). As rates move higher, equities will gradually decline from current levels.