Tuesday, August 9, 2011

Fed Speaks

The Federal Reserve’s press release covering its recent meeting begins “Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.” Later, it continues, “the Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased.”

Its main action point is that the nation’s economy is “likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.” Talk about telegraphing what it probably already knows: the economy seems to be slipping into recession once again and the Fed is helpless, meaning continued high unemployment, no remedies for the real estate market and homeowners with mortgages under water, and continued low returns on any savings. And these conditions are not temporary: they are expected to last two years (and unless Congress ever learns to function again, they will last much longer). Imagine, three year Treasury notes (no longer AAA which is another farce from S&P, the folks who brought us triple A-rated collateralized debt obligations) now yield less than a half a percent!

Where this is all likely to end is anyone’s guess, including the learned economists at the Fed. The volatile markets are reflecting that uncertainty. Buying dividend paying stocks may the best option for income, but any severe recession could leave those stocks vulnerable, jeopardizing the return of capital. That seems where the Fed is leading the individual investor.