Money For Nothin' And... Fed Cuts Fed Funds Target To 0+
Share and bond markets rallied on Tuesday after the Federal Reserve
announced that it will give away new money for almost free, lowering the Fed Funds target range to a
historical low of 0% to 0.25%. The Fed had cut the Fed Funds rate in late October by 50 basis points. The new record low rate is a reaction to to the de facto status quo in treasury securities where short maturities of up to 6 months trade at yields below the upper end of the target range.
While markets welcomed the bold move, gold, the canary in the mine of inflation, advanced as well, piercing the important resistance at $850. Investors are obviously pricing in that
all Treasuries yield less than the inflation rate of currently 3.7% YOY.
But the move to a zero interest rate policy will come at the cost of higher inflation in 2009 and 2010, it can be safely predicted. Chairman Ben Bernanke and his fellow Federal Open Market Committee (FOMC) members pulled out all stops in order to jumpstart the economy and assured market participants that the Fed would continue to engage in the dubious game
of printing fresh money for collateral it does not want to talk about.
Once more proving their image of inflationistas par excellence the FOMC said the Fed can be expected to hold on to its free money policy for quite some time and use all tools to promote a return to growth.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
But money for nothing alone will not help, the Fed reasoned, preparing markets for more growth in the Fed's balance sheet after it has exploded from $800 billion to $2.2 trillion since last summer.
The above story is the opinion of the author only and it does not reflect
iStockAnalyst opinion. Further, the author is not personally advising you
regarding the suitability of the story for your investment needs. In no event
iStockAnalyst will be liable for any loss or damage including without
limitation, indirect or consequential loss or damage, or any loss or damage
whatsoever arising from or arising out of, or in connection with the use of this
information. Please consult your investment advisor before making any investment
decision.
