Watch That Thesis! (FOMC Announcement)

[AllentownJake]

All investment and trading decisions beyond an hour need a thesis.

Today's FOMC announcement ought to result in the realignment of yours:



We have monetized a scad of debt and that cash has wound up in equity markets. They have risen in response to the dynamic of supply and demand. Speaking of activity in the housing sector we're referring to the rocket-shot defaults on FHA mortgages.

Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.

Neither business or consumer activity supports stock prices or provides us with any sort of indication that credit demand growth is going to return any time soon.

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

We believe in the Easter Bunny and Santa Claus too, as shown by the clear contradiction with our previous paragraph.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

Prices are deflating, but we never use that word.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

We told you there was no credit demand and that neither consumer or business conditions warranted any sort of real optimism, but since you're hard-headed we'll say it again.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.

The flood of monetization that powered the market from 666 to 1070 is ending. We're going to taper this program down, mostly because we're rapidly becoming the entire market, and that's bad news (never mind that we might wind up with ALL of the credit risk, especially in the MBS market, which is substantial! That would suck.)

More at Link
http://market-ticker.denninger.net/archives/1463-Watch-That-Thesis!-FOMC-Announcement.html

[bemildred]

1. Yep. nt