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Christopher Mahoney
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I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman. PLEASE... More
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  • Bernanke Hits The Ball Out Of The Park 0 comments
    Sep 14, 2012 10:47 PM | about stocks: SPY

    FOMC Statement, Sept. 13th, 2012:
    "If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability."

    It may be safe to fight the Fed when it is floundering around ignoring its employment mandate. It isn't safe to fight the Fed when it decides to achieve its mandate.

    I had predicted that the FOMC would announce another round of QE, in the amount of $500B. I criticized the decision in advance by saying that the Fed should target outcomes rather than endless incremental inputs.

    I was wrong; I underestimated Bernanke's powers of persuasion with the hawks.
    It looks like he has finally used his considerable authority to begin to practice what he used to preach as a professor.

    He has announced that the Fed will continue to buy securities (QE3+) until the outlook for the labor market improves substantially. While it is true that he will do this in increments of $85 billion per month, he made an open-ended promise to keep buying bonds until his target is achieved. This is a major intellectual breakthough for the Fed.

    The Fed has begun to do what the ultra-doves (the "market monetarists") have been begging for since 2007: use its unlimited resources to fulfill its full employment mandate.

    I wonder if the hawks fully understand what they have just signed up for or, if they do understand it, whether they really mean it. That is because, I think it will cost at least another one trillion for the Fed to achieve its new target, and maybe two trillion.

    That means that the Fed will have to buy bonds at $85 billion per month for one to two years. That is probably beyond Bernanke's tenure in the job. Who knows what the next chairman will think of this policy? And if ever inflation dares to rise one iota over 2%, the Fed will have an excuse to stop the whole exercise.

    Unlike the Supreme Court, the Fed is not bound by its own precedents, and can change its mind at any time (as it just did). Nonetheless, this is the first time in history that the Fed has targeted employment growth by any means necessary.

    In the past, the Fed's weapons were conventional (interest rates) and unconventional (incremental QE), but never open-ended QE. The last time something like this happened was when FDR horrified economists by raising the price of gold until commodity prices recovered (which was 100% successful).

    In my view, it is no longer safe to fight the Fed. The Fed has gone nuclear, and it can't lose at least as long as Bernanke is chairman. The era of weak recovery and high unemployment is over, if Ben follows through. The risk of an inflationary shock is low. Therefore, the Equity Risk Premium is high at the same time that the earnings outlook is good. Also, no matter what happens in Europe, the Fed can overcome it as long as it pursues its new policy. I find it hard not to be bullish. I am buying SPY.

    Disclosure: I am long SPY.

    Themes: fed, bernanke, qe3 Stocks: SPY
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