The FOMC Statement and Why I'm Recommending Precious Metals Again

The Federal Reserve is set to continue its ZIRP (zero interest rate policy) until spring 2010. According to the statement released after the latest 2-day meeting of the Federal Open Market Committee (FOMC) the Fed kept its key interest rate unchanged at the level of 0% to 0.25%. While the Fed sees the economy picking up I'm sticking with my opinion that U.S. GDP is actually still contracting but for the unlimited spending on killing devices.

Ben Still Doesn't Get It

As all FOMC members voted for the continuation of doing nothing despite gold showing clearly that inflation will set in next year one can expect that inflation will surge next year to levels not seen since the 1970/80s. Contradicting myself in one sentence, I advise investors to be extremely cautious as the Fed is way too optimistic in seeing a recovery:

Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.

The cryptic FOMC statement shows at least that we certainly cannot talk about a Goldilocks economy anymore:

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. 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.

Acknowledging declining consumer demand the Fed expects inflation to remain subdued:

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.

I am not sure that the gradual tightening of the Fed's purchase programs will achieve the wished result of higher ABS prices. According to the statement the Fed will slow its purchases:

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 about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.

Sorry, this statement is of little help to investors that want to find out whether the Fed will remain on its course of monetizing the debt or whether it may think about a real solution rather than the fantasy security prices they pay because nobody else wants to buy these toxic assets.

Gold's surge Wednesday is a clear reminder that investors worldwide are wary about the future of the value of Federal Reserve Notes (FRN) and its potential purchasing power down the road.

Although this blog refrains to give actual investment advice I feel safe to recommend precious metals again.

Disclosure: Long gold bullion

Comments

[USisCorrupt:]

"Recommending again?"

Heck I have NEVER left! The clock is ticking when the US Toilet Paper is FLUSHED! Load up on PHYSICAL PM's if you want any future. And I DON'T mean the paper gold & silver the GLD & SLV which is just another Ponzi scheme!

Nov 05 08:52 AM

[sorgmot:]

The FRB is giving out interest free money for you to invest in stocks.

Everyone is doing it. Borrow and Buy stocks. They are going up.

Company earning prospects are weak. Company P/E ratios are high.

Who cares? Buy, buy. Get in on the run.

But wait. What happens when interest rates rise?

Market crash when interest rates rise.

Nov 05 11:40 AM

[Prudent Inv...:]

@USisCorrupt: Pls check my blog as I have been recommending gold since 2005.

Nov 05 05:52 PM