Wednesday, August 10, 2011

FOMC and the Thundering Herd

Since this last weekend, I have been privately commenting that the Tuesday meeting of the Federal Reserve Open Market Committee (FOMC) would little to say other than they were continuing to watch and are prepared to act.   There have been no significant changes in liquidity needs.  There is no need to buy US Treasuries with short tern yields negative as investors pay for safety.  They cannot do anything to create jobs as that is primarily a fiscal policy issue and the failure of Congress and the President.  I also said the announcement on Tuesday was likely to affect the market and, if I was the FED, I would make the usually very carefully worded announcement after the market closed to give the market overnight to digest it, because there is nothing more stupid than cows in a nervous herd.

The FED statement was as expected, although longer than usual, with an extension of low interest rates into 2013, no changes in policy, and a change in language acknowledging slower recovery (growth) over coming quarters than previously estimated.  These were obvious and to be expected, although three members wanted to essentially keep prior statement language.  The FED made this at 2:15 eastern time during the market, which almost immediately swung down from positive action as the cows failed to stop and think --- and the herd took off in a storm of fear.

The Tuesday market was volatile the whole day going up and down and up, which is not a good indicator of future market action.  The market ended up 429 points at the end, as some of the cows woke up after the cowboys started buying and the realization that the FED was only stating the obvious about the reality of slowing (a soft word for declining) growth.

The economy has an increasing amount of uncertainty in it to the point that statements of truth are disruptive.  Rather than deny truth and reality, we need to increase certainty and growth by creating jobs which provide the confidence for people and corporations to buy.  Creating jobs requires increased sales in the private sector and spending in the public sector to directly provide job creation and sales.

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