FOMC Statement: Two Years Of A Crap Economy?

This is a massive downgrade on the economy folks….

Release Date: August 9, 2011

For immediate release

Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected.  Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.  Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.  However, business investment in equipment and software continues to expand.  Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity.  Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions.  More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks.  Longer-term inflation expectations have remained stable.

The economy is going to hell.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.  The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further.  However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

In other words, we’re back in recession.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.  The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.  The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

ZIRP for at least two more years.  Therefore:

  • If you’re a saver, you’re screwed.  Buy stocks and lose half or more of your money or accept nothing (less, of course, any actual inflation.) Senior citizens should be literally in the streets on this announcement.
  • The economy is going to suck. That’s The Fed’s projection.  If you’re long the market, you’re in the wrong place.  Oh sure, we might get more bounce for a while, but if the economic outlook really justifies zero interest rates then profits have peaked – period.
  • The banks are dead. NIM is going to get destroyed.  The start of ZIRP looks good for banks but the numerical spread, not the percentage spread, collapses as it goes on.  Look at Japan and their JGBs! Now about that profit you think banks are going to earn….. exactly how are they going to earn it lending money with no spread?

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.  It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.

This is REAL dissent – three, not one.

The market is trying to figure out whether to crap or go blind, but the bottom line here is that not only does The Fed expect a short term slowdown in the economy they have basically said that their expectation is that the economy is going to suck for at least the next two years.

Discussion (registration required to post)
I’m going to add that this statement caused one of the most immediate and violent reactions in the US bond market I’ve ever seen.   Rick Santelli on CNBC explained it this way:
“The 5-year Treasury has become the new 2-year; the 2 year note has become an overnight T-Bill and the 1-year note has become….hell, I dunno.”
This means that our government is going to have to roll more and more debt on a much shorter duration.  We have nothing banked or locked-in for the future.  This is like taking that option-arm loan that starts out at 2% but later when it resets…..
The Federal Reserve just priced in a massive deflationary depression.  Regardless of what Bernanke’s mouth is saying, the  bond market is telling Mr. Bernanke his helicopter has no engine.   The economy cannot and will not recover without actual growth and there can be no growth from nothing but debt.  This is not to say our stock market may not have a massive rally here, but it is all driven by debt and not growth.  Don’t be fooled because we just saw what it looks like when reality hits the stock market….and it will.  It always does.