This was written on 9/22/10. This is actually most of the update for the previous day with some information added for people who are new to my thinking.
Today, 9/21/10, was another FOMC meeting day - and the market meandered, as usual, before the announcement that is made immediately after the meeting.
More specifically, before the announcement following the meeting, the market meandered sideways for a while at or just below zero and then went into a sloppy contracting triangle below zero, losing more and more momentum (on a small scale, it was a small triangle) as time went on, i.e., spending more and more time closer to the bottom of the triangle (i.e., it was a contracting triangle downward), and finally went below the bottom of the triangle just a few minutes before the Fed statement was to come out.
At that point, the traders panicked (how dare the market go down just a few minutes before they might, hopefully, get some good news from the Fed! - they were hoping for good news out of the Fed announcement to lift their spirits) and they rammed the market straight up, very quickly after that all the way to zero. Then it started drifting down again.
Then the Fed statement came out - and the first paragraph read as follows:
"Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term."
That is probably the longest, starkest, clearest, and plainest litany of economic woes a Fed statement following an FOMC meeting has ever had. (I might add that an assessment of the economy is always in the first paragraph of the statement.) Things are so bad that the Fed clearly decided it had no choice but to be utterly, totally, and completely frank about the situation if it is to retain any credibility. I will note that previous recent statements had most of the same wording, but it seems to me that it has even more frank wording in it this time.
I will note that the phrase "The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability" has been in every FOMC statement lately and as far as I can remember, has been for at least a couple of years. That statement is a classic Keynesian economics statement - it is from a modern Keynesian perspective - and it is in there because the Keynesians honestly believe that it is possible to return to higher levels of resource utilization (which would be necessary for full employment) in a context of price stability (which the Fed always puts in that statement because the Fed has a dual mandate - for full employment at low inflation).
The reality is that as is noted elsewhere on this website, economic growth goes down over the course of time as a long-term economic cycle matures - and ours is very mature in the meantime (thanks to the enforcement of the law against recessions for so many years). As a result, our economic growth is low for an economy that is still growing - and low economic growth makes for fairly low resource utilization. In fact, our resource utilization has gradually been going down, in phases, for many years already - decades. That is a long-established trend that is not going to be turned around - contrary to what the Keynesians think. So we may bring resource utilization up a bit again (although I really kind of doubt that) - but if we do, it won't be by much and it won't be for long. The next major move is going to be a big one down.
The second paragraph of the FOMC statement read as follows:
"Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate."
This is a statement, when put in plain English, that says that the Fed thinks we are too close to deflation - and possibly extended deflation at that (which we are, by the way - my website in fact predicts that). This is a major warning from the Fed. (By the way, the Fed never uses the word deflation in public press releases - probably because they are afraid that if they mention the word at all in public, deflation will become a self-fulfilling prophesy. Thus, the cryptic wording.)
In response to the second paragraph, the Wall Street traders promptly rammed the market straight down a ways.
Then they read more of the statement.
A following paragraph is as follows:
"The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate."
That is probably among the lamest statements the Fed has ever made in an FOMC statement with regard to its plans and abilities to deal with negative circumstances of the time (note, in particular, the wording "to return inflation, over time...".
But in response, the stock market soared - the Dow went up over 100 points to over 80 points above zero, almost straight up. "Hurray, the Fed is going to do something!" is apparently what the traders were thinking.
That is probably the most extreme, most emphatic, most desperate response I have ever seen from traders in response to such a lame "we will try to do something" statement from the Fed in an FOMC statement, i.e., the most extreme response I have ever seen relative to how emphatic (i.e., not) the Fed statement actually was. In other words, the traders seem to be indicating that they are absolutely desperate for good news in the meantime in an effort to support Fed Chairman Bernanke in his effort to continue to enforce the law against recessions. Fed statements usually say at that point in the statement something along the lines of "We will do everything we can" or "We will act aggressively" or "We will do everything the Fed can do," i.e., statements that indicate a perspective to do anything that they can do or at least indicate intent of major effort, all of which are actually nonsense because in the environment of recent and current times, the Fed can't actually do much at all, but such statements are intended to convey the idea that the Fed is on top of things; this time around, the statement is much more subdued, much less dramatic-sounding/emphatic-sounding.
And, apparently, soon after reading the wording, the traders noticed that - because the market had a spike high at Dow 10,833 after the blast-up and then came right back down again. Suddenly, they were not celebrating so much anymore.
And, in fact, somewhat more slowly than on the way up (but not much more slowly), the market did come back down - all the way back down to zero for the day. It in fact went below zero before the traders panicked again and spiked it back some points above zero, but that is all they managed to do, then the market rolled over again as the end of the day approached and it started going down again, with the Dow closing up just 7 points at 10,761.
Another part of the FOMC statement, above the part that I just quoted, read as follows:
"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period."
That statement has been in there for quite some time (i.e., several such press releases) - and the first part, about keeping the interest rate very low, is based on the belief of the Keynesians that if they keep interest rates very low, they will, at least eventually, encourage economic growth again.
The problem with that notion harks back to the issue of economic growth going down over the course of time as a long-term economic cycle matures - which I commented about above.
The more mature the cycle is, the harder it is to get economic growth going again - and we are at a VERY mature point in the cycle in the meantime.
In fact, I think we are SO late in the cycle that the strategy won't work at all anymore - and the signs of that are everywhere (and have been for some time) and the fact that it is not working yet is why the Fed has the wording in the statement about keeping interest rates low for an extended period. In other words, the attitude is that if it is not working, just try it some more in an effort to make it work anyway.
The problem is that it won't work - we are too late in the cycle for that and that is why nowhere near as much progress is being made as the Fed has been hoping for.
In fact, we are so late in the cycle (due to the continued pushing for such a long period of time as a result of the law against recessions) that I think there is no way enough economic growth can be generated this time around to get the United States back on track. In other words, there has been a partial recovery (there always is during a big downturn) - but the imbalances are so huge in the meantime that this very weak recovery is nowhere near enough to overcome those imbalances and so the economy will roll over and go into a downturn again and that will be a much bigger downturn than the previous one for reasons given elsewhere on this website. In other words, in the big picture, as of when I am writing this, we are really right on the edge of the precipice.
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