Fed Policy - How Will Market Respond?

by: TraderRob

Few expect the U.S. Federal Reserve's FOMC to announce any change to the current monetary policy. The Fed Funds rate target is expected to stay at 0.25%, despite effective rates closer to 0.1%, while language will promise that purchase programs of private debt and Fannie (FNM) /Freddie (FRE) mortgage products are soon to wind down. Conditions of the "dual mandate" of low inflation and job growth, set by Bernanke earlier this year for the Fed, look to be nearing levels that would spur preemptive withdrawal of quantitative easing. The Producer Price Index (PPI) in November showed a 1.2% jump from the same month in 2008 and the household survey of employment showed improvement in the jobless rate from 10.2% to 10.0% in November.

We have maintained the position that over time sustained dollar weakness, due to low short term borrowing costs, will raise the prices of all goods and services changing hands in the U.S. We also suspect that the printing of money will dilute the value of the dollar and that that inflation will bring a second wage of hardship to consumers struggling to make payments.

The FOMC has had a couple weeks to mull over the November Jobs report, but the PPI came out during the board's Tuesday deliberation and the Consumer Price Index will be crossing tickers as the governors are finalizing arguments and deciding on rhetoric for the announcement. We see little chance of a nominal policy change but suspect the language will have some recognition of the stronger jobs situation and inflation risk moving forward. This is all that will be needed for the dollar to rally much higher and for stocks to see a sell-off after a few days of mixed reaction to the implications of a rising Fed Funds in the next three months.

We encourage readers to exit long gold positions ahead of the announcement, especially BVN (Buenaventura Mining Corp) which we have recently endorsed. We also endorse adding dollars to short oil positions, by simply shorting the USO or adding to DTO positions (Powershares Double Short Oil ETF).

Sell BVN

BVN, 12-16-09


DTO, 12-16-09

Disclosure: Long DTO