The policy-setting arm of the Federal Reserve, the Federal Open Market Committee, released a much anticipated statement yesterday after the conclusion of its September meeting.
Economists and investors alike take great pains to examine the nuances between successive Fed statements, and the focus on the details has only become more fervent with the US economy teetering once again. Looking at the clues put forward by such differences in the Fed’s September and August statements, the FOMC sees signs the economy is taking a step back.
Only hours after the National Bureau of Economic Research (NBER) declared that the recession ended in June of 2009, the Fed countered with a far less rosy picture. And while we don’t doubt the NBER’s ability to correctly date the beginning and end of the business cycle, we certainly question whether we’ve entered another recession at this point (of course, the NBER won’t be able to answer this question for some months).
The Fed made some important additions and subtractions in yesterday’s statement versus their August meeting. In general, the FOMC noted that the pace of recovery has slowed from earlier readings. Notably, business spending is less rapid. Certainly an issue when we’re all too aware of what’s going on in consumers minds (read: unemployment). Bank lending has continued to contract, although, the Fed noted, at a reduced rate in recent months. It remains to be seen whether conditions getting “less bad” are cause for hope.
Importantly, the FOMC also noted that underlying inflation is “currently at levels somewhat below those [that] promote maximum employment and price stability.” In its August statement, the notes read that measures of inflation had trended lower. We see this statement in particular as another coal in the fire stoking another round of quantitative easing, or QE2.
Not to mention, of course, that the FOMC explicitly states that it “is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”
Again, with each new (poor) economic reading, and the rhetoric becoming clearer in its statements, the FOMC is getting closer to unleashing another package to stoke lending and boost the economy. The initial reaction will likely be a stock market rally, but it is a question as to how far it can go with out real underlying economic growth. Employment improvements, specifically those benefiting the country with long-term solutions to the energy crisis, are America’s best hope for a sustained recovery. Beyond the stock market, the money printing will also stoke inflation fires and further the debasement of the US dollar.
The market has seen this coming, and not surprisingly bid up the price of gold to new highs. We have long been promoting the benefits of gold in investors’ portfolios as a hedge against both deflation and inflation. The impending easing only hastens the need to have a sizeable position of gold, and the more leveraged gold miners, in a portfolio. We see higher highs ahead for the yellow metal, and recommend getting in at these levels to ensure investors protect the purchasing power of their assets as inflation rears its head.