Fed Continues Accommodative Stance – 9/14/12

The two big stories this week were the Federal Reserve’s announcement of more aggressive stimulus for the economy and the threat to U.S. Embassies and citizens in many Mid East Countries.

The Federal Reserve sent a very clear message that they will continue to support record low interest rates with monetary policy tools for several more years in an announcement on Thursday of this week.  The central bank said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month.  Fed Chairman Ben Bernanke and the Federal Open Market Committee (FOMC) is taking a more aggressive approach then most economists predicted and financial markets pushed higher after this announcement .  The Federal Reserve has a dual mandate of full employment and stable prices.  This latest announcement clearly shows that the Fed will go above and beyond in its efforts to help the economy create jobs and that they feel inflation is still moderate and within an acceptable range.

Although this new Fed program is aimed at reducing the unemployment rate, we still maintain that the primary catalyst associated with job creation is business confidence.  CEO’s want more clarity on taxes and the regulatory environment and until they get some visibility on this they will continue to hold off on big financial commitments.  The November elections will play a major role in business confidence and Congress still needs to address the impending “Fiscal Cliff” that is inevitable if they continue on their current path.  We do not expect any new major legislation until after the Presidential election.

The Mid East protests and violence against our Embassies and U.S citizens abroad appears to be a coordinated undertaking that comes at a time when U.S. policy with Israel is front and center.  These events will continue to create headline news and it will be important to see the reaction from these foreign Governments to calm the situation down.  Currently we do not think this is an event that has a dramatic macro-economic impact but it ties in with the Israel/Iran conflict which certainly could be a serious issue for the markets if it is not managed properly by the Administration.  We will be keeping a close eye on both of these issues…