No Change in Fed Policy, Growth Outlook Reduced

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The biggest news of the Federal Reserve’s March 20 press conference had nothing to do with its announcement to keep its policy of monetary easing steady.      

Instead, Peter Barnes of Fox Business caused some chuckling at the super serious press conference when he asked Chairman Ben Bernanke whether there was “still time to get into the market.”

The Federal Reserve has been monetizing $85 billion in debt per month since last September and Bernanke has frequently pointed out that he thinks this policy will help asset boost asset prices such as stocks. If consumers feel wealthier because their portfolios go up in value, they are more likely to spend, thereby helping the economy, so the theory goes.

This time, Bernanke was a bit less sanguine about the stock market and cautioned: “We are not measuring success in terms of the stock market.”

Most experts agree, however, that easy Fed policy has helped the Dow Jones Industrial Average reach record nominal highs in March this year.

Victor Sperandeo, a Dallas-based trader says: “Everything has to be put into context. Zero interest rates for four years, three-and-a-half years into a recovery and then the Fed has done QE1, QE2, QE3 and two operations twist. What would happen if there was no Fed, we’d be in collapse. Now the Fed is buying $85 billion per month.”  

In terms of underlying economic performance, the Fed still sees some risks for the economic outlook, as it downgraded its 2013 growth outlook to 2.3-2.8 percent from 2.3-3.0 percent previously. It also thinks unemployment will remain elevated at 7.3-7.5 percent. It stated it will continue to buy up $85 billion of Treasury and mortgage backed debt until inflation rises or unemployment drops to a certain level. 

 

 


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