I guess this serves as another “I told you so moment”.
From Bloomberg,
The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.
“We’re looking for ongoing, sustained improvement in the labor market,” Chairman Ben S. Bernanke said in his press conference today in Washington following the conclusion of a two-day meeting of the Federal Open Market Committee. “There’s not a specific number we have in mind. What we’ve seen in the last six months isn’t it.”
Stocks jumped, sending benchmark indexes to the highest levels since 2007, and gold climbed as the Fed said it will continue buying assets, undertake additional purchases and employ other policy tools as appropriate “if the outlook for the labor market does not improve substantially.”…
The FOMC also said it would probably hold the federal funds rate near zero “at least through mid-2015.” Since January, the Fed had said the rate was likely to stay low at least through late 2014. The Fed said “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”
Two important things from this development: the FED will engage in “open-ended purchases” of mortgage debt each month and that “federal funds rate near zero “at least through mid-2015.””
This essentially adds to the $267 Operation Twist 2.0 launched last June.
Chart from Doug Short/Business Insider
Bernanke’s panoply of bazookas has been intensifying. Inflationism is being piggybacked by greater inflationism. While this may not be enough (it never will), this may be near the zenith of the Fed’s arsenal of policies. Perhaps the FED will be buying other forms of debt or even equities in the future but may not beat the “open-ended option”
In short I expect diminishing returns from the Fed’s seemingly maxed out actions.
Yet as I previously noted,
With unlimited or open ended options (US Federal Reserve has already been taking this in consideration), central bankers have been increasingly signaling urgency and desperation.
While QE 3.0 provides short term boosts for the financial markets due to its narcotic effects (see the wonderful chart above), the risks is that this RISK ON environment may be short-lived because of the growing risks of stagflation
Chart from Moneyandmarkets,com
The open ended QE 3.0 comes amidst higher inflation expectations which only magnifies price inflation risks.
Of course Bernanke had to deliver, that’s because market’s expectations have built-in heavily to the Fed’s promises, I wrote,
Mounting expectations and deepening dependence from central banking opiate, which has been clashing with the unfolding economic reality, will prompt for more price volatility on both directions. The Bank of America posits that QE 3.0 has been substantially priced in.
Eventually stock markets will either reflect on economic reality or that central bankers will have to relent to the market’s expectations. Otherwise fat tail risks may also become a harsh reality.
Not only that, the fiscal conditions of the US government would require more funding from the FED. This will likely be done indirectly through banks, i.e. FED buys banks mortgages and banks are likely to buy US Treasuries in return. We’ve called the poker bluff (of claims that the FED won’t do QE) here before.
Lastly, Bernanke’s tidal wave of inflationism subtly proves the point that officials work to promote their self-interest; surging stock markets now tilt the balance considerably towards Obama’s re-election.
Again as I wrote,
Also considering that President Obama’s opponent, Mitt Romney, has piggybacked on Ron Paul initiative to have the US Federal Reserve audited, which thereby diminishes the political power of Ben Bernanke, we cannot rule out that Mr. Bernanke will use the banking system and the Fed’s monetary tools to ensure Obama’s re-election.
I’d gradually get exposed on gold related issues. Gold’s bull market has resumed.
Just one more point, the death cross seen in Gold’s price action last April is likely another chart pattern failure as the imminence to the “golden cross” reveals of another “whipsaw”. This once again shows that actions from policymakers shapes chart patterns and not vice versa.
People who claim of the supposed efficacy of begging the question “history repeats itself” have been misled by the gambler’s fallacy.
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