Despite the Fed policy meeting's decision being announced later today, it's given that the Fed Fund rates will be maintained at close to zero. The question is if they will give any indications as to how long they will keep rates at low levels and if the $1.25 Tril purchase mortgage backed securities purchase program will be extended beyond the planned December end date.
Given that banks are still mostly unwilling to lend to the US consumer as they shore up their balance sheets, the Fed may have to keep its accommodative policies intact for a while longer. This despite the huge amounts of liquidity the Fed has provided to banks. As such, we could possibly see an extension (with more funding or possibly a "watered-down" version) or a new replacement (providing similar liquidity) for the MBS purchase program. The data below shows the total bank loans based on releases from the Fed (chart courtesy of Bloomberg). Total loans right now are at $6.8 Tril, still down from the peak of $7.3 Tril in 2008.
What this all means is that inflation is clearly not a concern as of the moment. This may be why bonds have recently been performing well along with equities. Gold may have a choppy ride, but low rates should keep the dollar weak, thus gold should remain relatively strong. For stocks however, it is a more complicated scenario since equities are mostly more forward-looking than other asset classes. It means a longer path towards inflation, prolonged accommodative policies to help businesses recover (until lending kicks in), as well as higher valuations for stocks on lower discount rates.
