Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Federal Reserve Extends Reckless Rate Policy Until 2014

|Includes: DIA, QQQ, SPDR S&P 500 Trust ETF (SPY)

Today, the US Federal Reserve announced that it intends to hold the federal funds rate at "exceptionally low levels" until at least 2014.

Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions-including low rates of resource utilization and a subdued outlook for inflation over the medium run-are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

As shown on the following graph, the federal funds rate has been held at essentially zero for the past three years.

 

 

If the current policy is maintained until 2014, even greater structural imbalances will be introduced into the system. Chairman Bernanke continues to believe that driving investors into risky asset classes such as equities is the most prudent course of action as the economy struggles under the weight of excessive debt. The tacit assumption is that it will be relatively painless to withdraw the excess liquidity that continues to be introduced. In theory, as long as market participants believe that these operations are not permanent additions to the money supply, there should be no meaningful impact on long-term inflation. However, we believe that it will be extremely difficult to reverse these programs without engendering significant economic disruptions. Instead of addressing the structural problems that are acting as a drag on the economy, the Federal Reserve continues to kick the proverbial can down the road and hope that they will somehow be easier to solve later on. Unfortunately, the net impact of these temporary measures will ultimately be to make a painful resolution process even more so several years from now. The foundation for the next structural growth cycle cannot be created until the excessive debt problem is addressed in a meaningful way and we continue to avoid taking the necessary steps to do so. As a result, financial markets will likely continue to exhibit extreme volatility and experience violent moves in both directions for the foreseeable future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.