Fed Statement--Will Print More Money If Stock Market Declines

Here it is:
Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term.

Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.

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, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.

The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.
The last part is what the market wanted to hear. In plain english the Fed announced that they will print more money if the SP 500 declines substantially. Nothing like an explicit Fed guarantee to support asset prices. First reaction from the market seems positive with the SP 500 reversing most of its losses.

You can really see how determined the Fed is in its pursuit to create inflation. How stable prices and positive inflation are compatible is beyond me. I thought truly stable prices meant 0% inflation, but then again I care about the purchasing power of the dollar. The Fed obviously does not. The dollar is getting smacked in the minutes after the Fed statement. EUR/USD is over 1.32. Gold futures hit record high. Ahh--more competitve currency devaluations, just like the 1930's.

As an aside, hats off to Mr. Hoenig who voted against Zimbawe Ben and his loyal followers.

Black Swan Insights


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