The Fed's Decision: A Desperate Statement

Includes: BAC, C, JPM, WFC
by: Todd Sullivan

Here's the Fed's Decision.

OK, so what does it all mean? The Fed is limited to what it can do and has resigned itself to sitting back and waiting things out. Lower rates (essentially zero) have not spurred lending or much economic activity and they are possibly about to purchase the worst assets on banks' books. The Fed now has a 2 trillion dollar balance sheet and that looks to grow. Growing it with quality assets is one thing, but to grow it now with banks' junk, well, that isn't good.

The big banks, JP Morgan (NYSE:JPM), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC) and Citi (NYSE:C) have received their TARP funds and will most likely not want more. This means the strings Congress want to impose on them to force lending will be toothless.

So now the Fed is forced to buy Treasuries to expand the money supply. What they will do then is add to the bubble already existing in them. The collapse of that bubble will cause interest rates to spike (that's really bad in a recession). Since the Fed is already essentially at zero, it can do nothing to stop the rise, except, buy huge amounts of Treasuries and maintain the bubble itself.

See where this goes? The Treasury will issue bills the Fed will buy while the Fed is buying the toxic assets on banks' books ... yeah ... this will end well, no problem.

Disclosure: Long WFC