Thursday, 13 September 2012

The Fed to continue its price distorting operations

Ben Bernanke reports,
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. 
How this will help employment remains unknown. He continues,
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
And on interest rates,
In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. 
More money printing, more moral hazard, more price manipulation, keeping interest rates lower for longer, all leading to yet more malinvestment - bottom line: more of the stuff that got the U.S. into the current mess to begin with and which have helped the market not to self-correct to date. On top of this, the Fed's balance sheet becomes even riskier through extending the maturities of the assets it holds (increasing duration). This further weakens whatever backing left there is for the U.S. dollar.

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