- Conditions in financial markets have generally improved in recent months.
- Household spending has shown further signs of stabilizing
- Businesses appear to be making progress in bringing inventory stocks into better alignment with sales.
- The Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustained economic growth in a context of price stability.
- Substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.
- Household spending remains constrained by ongoing job losses, lower housing wealth and tight credit.
- Businesses are cutting back on fixed investment and staffing
- Economic activity is likely to remain weak for a time
- Prices of energy and other commodities have risen of late
- In typical fashion, the Fed has attempted to cover all the bases and calm the markets with little success. The Fed remains between an exceptionally weak economy with concern that providing excessive stimulus which will exacerbate fears of inflation given the explosion of the Fed’s balance sheet. The Bernanke Conundrum remains very much in place.
In response, on Wednesday, bonds have sold off in anticipation of a pleasant surprise in the form of an increase in its quantitative easing by the Feds. With the selloff in bonds, interest rates moved higher by approximately 10 basis points and the 10yr U.S. Treasury is now quoted at 3.7%. Equities also sold off with the DJIA and S&P 500 both retracing by approximately 1% after the Fed’s statement. The Nasdaq has held up given positive earnings from Oracle.
It is noted that interest rates are likely to continue to rise given the continuing yet overwhelming funding needs for the foreseeable future. As rates move higher, equities will gradually decline from current levels. Concern over possibility of inflations remains high.
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