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Article Index

What's So "Open" About the Federal Open Market Committee?

By , Chief Investment Strategist, Money Morning • @ShahGilani_TW -

Don't you just love how some things are named?

Like the Federal Reserve System, for instance. It's a central bank that was conceived in the private study of a private hunting lodge on a private island by a bunch of private bankers who didn't want to use the word "bank" in its name to fool taxpayers who thought it was a "system" to safeguard the public... from the very bankers who conceived it.

I don't know about you, but the feeling of safety I have is just overwhelming... NOT.

Then there's the Federal Open Market Committee (FOMC). That's a committee of top plotters that meets in private to discuss what's going on in "free" markets so they can figure out how to manipulate them.

The Open Market Committee, or the Old Boys Club (they have a woman on the committee, but she's just a token "dove" who plays "Follow the Beard"), meets today and Wednesday to check on how their manipulations have stopped unruly free markets from sinking the banks that secretly run the Fed (you know it's not a secret, but there are a whole lot of taxpayers who don't).

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FOMC Meeting Message: Don't Blame Us for Sluggish Economy

By , Contributing Writer, Money Morning -

The Federal Open Market Committee (FOMC) meeting concluded today (Wednesday) with one clear message to Washington: Thanks for the lousy economy.

Central bank members cited only "moderate" expansion in economic activity and a slow improvement in the stubbornly high unemployment level.

Acknowledging the economy is moving at an unhurried pace, the FOMC members pointed an accusing finger at Capitol Hill.

"Fiscal policy is restraining economic growth," the statement read. That remark was in direct reference to a deadlocked Congress, sequestration and its far-reaching impact.

A spate of fresh economic reports back that sentiment:

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FOMC Meeting Minutes Signal These Investment Moves to Make Now

By , Contributing Writer, Money Morning -

It's clear from the leaked Federal Open Market Committee (FOMC) meeting minutes that the Fed isn't taking away the punchbowl quite yet - but investors can take steps now to be prepared for an eventual sign that quantitative easing will end.

The FOMC meeting minutes show the central bank remains divided on when to end QE and raise interest rates.

The Fed's current policy of buying $45 billion in Treasuries and $40 billion in mortgage-backed securities monthly will remain in place at least through midyear. Near-zero interest rates also look safe until 2015.

The Fed has held short-term rates at historic lows since 2008, with a goal of juicing the anemic U.S. economy. The Fed minutes reiterated that Bernanke and company will keep rates super low until the unemployment rate dips below 6.5% or inflation rises above 2.5% a year.

The monthly March jobs report, released after the March 19-20 Fed meeting, showed a significant slowdown in job creation. While the unemployment rate ticked down to 7.6% from 7.7%, the rate decreased largely because a huge number of people stopped looking for work.

The glum employment data could even extend the Fed's 2015 date to raise interest rates.

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FOMC Meeting: The Fed's Latest Plan

By , Contributing Writer, Money Morning -

As expected, the U.S. Federal Reserve decided on Wednesday to keep interest rates at historic lows and to continue with its $85 billion in monthly bond-buying stimulus, despite a more optimistic labor outlook.

It was a near-unanimous 11-1 vote in favor of the decision, announced at the conclusion of the two-day FOMC meeting. Kansas City Fed President Esther George was the sole holdout.

The Fed said that while fresh information since the January FOMC meeting suggests "a return to moderate economic growth following a pause late last year, fiscal policy has become somewhat more restrictive."

In defense of its ongoing bond buying, the statement read, "To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month."

The aim remains the same: "to maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader conditions more accommodative."

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Ben Bernanke Testimony: We Have "Belts, Suspenders" to Unwind Balance Sheet

By , Money Morning -

The two-day Ben Bernanke testimony before Congress continues today (Wednesday) as the U.S. Federal Reserve Chairman faces the House Financial Services Committee. Members will grill Bernanke for more information on the Fed's exit strategy from quantitative easing (QE) and its easy money policy.

While Bernanke did admit yesterday to the Senate Banking Committee that "there's no risk-free approach" to unwinding the $85 billion-a-month bond-buying program, he shed little light on how the QE measures would end.

In fact, Bernanke's vague answer to Sen. Richard Shelby, R-AL, when asked how the Fed will deleverage the balance sheet, was this: "In terms of exiting from our balance sheet... a couple of years ago we put out a plan; we have a set of tools. I think we have belts, suspenders - two pairs of suspenders. I think we have the technical means to unwind at the appropriate time; of course picking the exact moment to do, of course, is always difficult."

The buying is expected to continue until the Fed sees the unemployment rate fall to at least 6.5%, but Fed critics are concerned about the nearly $3 trillion balance sheet Bernanke has built up already.

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Fed Meeting Today: Are You Ready for QE3?

By , Money Morning -

Investors have prepared for the Federal Open Market Committee (FOMC) meeting today and tomorrow to end with the announcement of a third round of quantitative easing (QE3) - and that's a good bet to make.

Today's Fed meeting will likely end with more of the same information we've been hearing for months from U.S. Federal Reserve Chairman Ben Bernanke. It's been a year and a half since Bernanke first announced that short-term interest rates would remain near zero "for an extended period." That language will likely stay the same tomorrow, and the policy timelines could be drawn out even longer.

There is also no doubt that QE3 or some other meaningful economic stimulus measure is on its way.

Maury Harris, an analyst with UBS, declared in a recent note to clients that, "We now anticipate an announcement of another round of quantitative easing at the FOMC meeting on September 13th. We expect the easing will take the form of a six-month program of at least $500 billion, primarily focused on Treasuries."

Harris also added that, "We also expect the FOMC extends their rate guidance into 2015."

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Gold Prices: Begging for QE3

By , Money Morning -

The Fed's Operation Twist announcement Wednesday slammed gold prices, and the yellow metal fell 2.5% Thursday.

Gold for August delivery ended last week down 3.8% to about $1,570 an ounce, well below its 2011 high of $1,920.30.

Before the two-day FOMC meeting, gold was up 4% year-to-date. Gold rose at the beginning of the week on hopes that the Fed would announce accommodative moves.

In the last round of easy-money moves back in January, gold rallied as high as 15% as investors flocked to the asset for protection. Since then, gold has dropped numerous times from a lack of additional news of more easing.

Gold was once again disappointed last week when the Fed said it would keep twisting, and the lack of a more aggressive maneuver failed to give a needed gold rally.

"To get gold really moving, you need a definite QE3," Sterling Smith, commodity analyst with Citi Institutional Client Group, told Kitco News. "Operation Twist is not nearly the food for a gold bull that outright QE is."

Gold Prices and Operation Twist

On Wednesday morning, the Fed announced the extension of its long-term government bond holdings by $267 billion to decrease borrowing costs while selling an equal figure of short-term securities to keep its $2.9 trillion balance sheet.

While scheduled to end this month, the Fed extended the Operation Twist program until the end of the year.

Operation Twist is derived from a Federal Reserve program that "twists" the yield curve or sells short-term securities from its holdings and buys longer-term ones in an effort to drive down longer-term yields.

Market watchers had been mixed about this happening.

Barclay's Capital saw Operation Twist as "the most likely outcome," saying it would provide additional time for the Fed to sift through and mull soft data that is "payback" from the additional warm winter hiring or a potentially lengthier prolonged slowdown, reported Kitco.

But since Operation Twist was considered the least the Fed could do, markets had priced it in already.

Jeffrey Wright, managing director and research analyst with Global Hunter Securities, said to Kitco he expected limited gains for gold on the heels of the "Twist," possibly to the $1,650 range, as the market has already been adding in the possibility for Fed action.

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Look to Emerging Markets as the Federal Reserve Diminishes the Dollar

By , Contributing Writer, Money Morning -

The main thrust of the past two months has been the renewed collapse of the U.S. dollar.

The dollar has been on a one-way elevator ride to the ground floor since August, when U.S. Federal Reserve Chairman Ben S. Bernanke first warned that quantitative easing was on the horizon.

Most recently, the minutes of the Federal Open Market Committee's (FOMC) last meeting telegraphed further monetary stimulus.

''In light of the considerable uncertainty about the current trajectory for the economy, some members saw merit in accumulating further information before reaching a decision about providing additional monetary stimulus," the minutes read. "In addition, members wanted to consider further the most effective framework for calibrating and communicating any additional steps to provide such stimulus. Several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the Committee's mandate, they would consider it appropriate to take action soon."

Concerns about inflation being too low almost guarantees additional quantitative easing unless the recovery gets a big shot in the arm before the next meeting in early November.

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Question of the Week: U.S. Federal Reserve Keeping Low Rates Does More Harm Than Good

By , Associate Editor, Money Morning -

After their meeting last week, U.S. Federal Reserve policymakers said they are more worried about deflation than inflation and vowed to look for ways to help along an economy that is experiencing worrisomely slow growth.

In fact, the central bank's rate-setting Federal Open Market Committee (FOMC) said it plans to keep the benchmark Federal Funds rate at its record-low level unchanged between 0.00% and 0.25% for the 20th consecutive month. And, using its go-to line - central bank policymakers said rates could remain that low for "an extended period."

In the near term, that appears justified. Core inflation is running at only 0.9%, below the Fed's comfort-level target of 1% to 2% - where it says the inflation rate needs to be for price stability. Fed Funds futures at the Chicago Board of Trade (CBOT) now show that traders believe there is a 54% chance the Fed won't increase short-term rates until its November 2011 policymaking meeting.

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We Want to Hear From You: Should the U.S. Federal Reserve Keep Interest Rates Low?

By , Associate Editor, Money Morning -

After their meeting yesterday (Tuesday), U.S. Federal Reserve policymakers said they are more worried about deflation than inflation and vowed to look for ways to help along an economy that is experiencing worrisomely slow growth.

In fact, the central bank's rate-setting Federal Open Market Committee (FOMC) said it plans to keep the benchmark Federal Funds rate at its record-low level unchanged between 0.00% and 0.25% for the 20th consecutive month. And, central bank policymakers said rates could remain that low for "an extended period."

In the near term, that appears justified. Core inflation is running at just 0.9%, below the Fed's comfort-level target of 1% to 2% - where it says the inflation rate needs to be for price stability. Fed Funds futures at the Chicago Board of Trade (CBOT) now show that traders believe there is a 54% chance the Fed won't increase short-term rates until its November 2011 policymaking meeting.

In the interim, faced with a still-wheezing economy, the central bank may even start buying back large blocks of U.S. Treasury bonds - a technique that pushes liquidity out where its needed.

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No Changes to Fed Policy

By , Money Morning -

The U.S. Federal Reserve today (Tuesday) kept its benchmark interest rate at a record low level Tuesday and made no changes to the key "extended period" policy pledge.

In its description of the economy, the Fed noted that "household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit." Also, the housing market has yet to turn a significant corner and the commercial real estate market remains in dire straits.

"Investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls," the Fed statement said.

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Fed Plan to End Mortgage-Backed Securities Purchase Program Brings Market Anxiety

By , Associate Editor, Money Morning -

Anxiety surrounds Tuesday's Federal Open Market Committee (FOMC) meeting as the central bank's year-long mortgage-backed securities (MBS) purchase program nears its scheduled March 31 close, opening the door for mortgage rate increases and surprising market fluctuations.

The Fed spent billions of dollars on MBS guaranteed by Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE) and Ginnie Mae weekly for the past year, topping out its portfolio at $1.25 trillion.

As the program ends, investors and analysts are speculating that mortgage rates could rise - and rise fast.

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Weak Job Market and Low Inflation Stall Fed's "Exit Strategy"

By , Associate Editor, Money Morning -

Any speculation that U.S. Federal Reserve Chairman Ben Bernanke had his finger on the "exit strategy" trigger has been silenced.

Bernanke yesterday (Wednesday) faced the House Financial Services Committee to instill public confidence in the Fed's ability to exercise a smooth exit strategy and quell continued fears of a tightening monetary policy.

The Federal Open Market Committee (FOMC) "continues to anticipate that economic conditions -- including low rates of resource utilization, subdued inflation trends, and stable inflation expectations -- are likely to warrant exceptionally low levels of the Federal Funds rate for an extended period," he said.

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Fed Gambles on Low Inflation and a Stable Housing Market

By , Managing Editor, Money Morning -

The so-called "exit strategy" has yet to enter the picture.

U.S. Federal Reserve policymakers yesterday (Wednesday) announced that the benchmark Federal Funds rate would remain in its record-low range of 0.00% to 0.25% for an "extended period." And policymakers also said that the nation's central bank would continue with its plan to wind down its purchases of agency debt and mortgage-backed securities.

The term "exit strategy" is a financial euphemism for boosting interest rates. By keeping short-term interest rates at what many experts say are artificially low levels, the Fed is betting that inflation will remain subdued in the short and medium-term and that the beleaguered U.S. housing market will be able to stage its recovery without crutches.

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Can Bernanke Tune Out Political Pressure as the FOMC Again Ponders Policy Changes?

By , Managing Editor, Money Morning -

When U.S. Federal Reserve Chairman Ben S. Bernanke emerges from the central bank's monthly policymaking meeting at around 2:15 p.m. today (Wednesday), it's a near certainty that he'll reaffirm his pledge to keep interest rates "exceptionally low" for an "extended period" of time.

Bernanke has kept the benchmark Federal Funds rate at a record low range of 0.00%-0.25% since December 2008, and that's not likely to change as a result of today's meeting of the central bank's Federal Open Market Committee (FOMC).

At some point, however, Bernanke will have to tighten credit and raise interest rates in order to soak up all the excess liquidity and curb inflation in the U.S. economy. But the question remains: When that time comes, will Bernanke have the fortitude to do so?

There's no simple answer. And for good reason: With the country mired in its worst financial crisis in most Americans' lifetimes, the central bank's decisions now are as political in focus as they are economic.

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