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Bernanke's FOMC Announcement: Correcting on Past Mistakes by Hiding Timeline from the Market
Pinnacle Digest writes: In Axel Merk’s latest article he explains the complex situation the Fed now finds itself in. Also, given Bernanke’s FOMC announcement (gamble) today - unleashing further QE - Merk warns investors that “you may want to consider taking action to protect the purchasing power of your hard earned dollars.”
The Problem for the Fed
After the Fed announced rates will remain near zero until late 2015 today (and will probably change that to late 2016 in a few months), it’s clear Bernanke and crew want to keep interest rates low across the yield curve as a way to induce economic activity by encouraging more borrowing. However, Axel Merk explains that if economic activity does pick up to a relatively strong level, that could send the bond market into a tailspin by raising long-term rates. This would immediately and drastically slow down economic activity. Merk explains it would also create a de leveraging process if rates began to rise and that would make all of Bernanke’s efforts wasted with a whole lot of debt incurred. It is our belief here at Pinnacle Digest that a situation like that could crush the American economy and potentially send it into a depression.
Another Challenge for Bernanke
Axel Merk states “Engaging in further rounds of asset purchases ("Quantitative Easing", "QE3", "QEn+1") may alleviate some of those upward pressures on interest rates, but the moment a program is announced, the market prices it in and looks ahead, threatening to mitigate any lasting impact of QEn+1. Picture the Fed as trying to hold a carrot in front of the donkey, well, market, to make us believe another stimulus is coming, without actually giving it. That way, the Fed can print less money to achieve its goals. The Fed calls it communication strategy.”
Bernanke Playing the Market for a Fool
As was discovered in the first two rounds of QE, the market gets excited after it’s announced, rallies for a few months, but then starts looking to the QE conclusion and sells-off (because Bernanke announced its duration), simultaneously slowing the economy. So how did Bernanke combat this in his communication strategy today? By announcing a $40 billion monthly program of buying mortgage debt for an indefinite amount of time! This was a very bold move and basically calls into question if a US dollar is really worth anything in the eyes of Bernanke. However, what Bernanke did achieve was now the market has no idea how long the purchasing will last and therefor, will hopefully stay in a euphoric state, driving asset prices up, for a lot longer than previous QE’s. It was an all-in move by the Fed and could signal QE announcements until the end of time (or likely until the end of the US dollar’s status as world reserve currency).
Merk explained Bernanke’s strategy very well when he stated “The basic challenge is – and we are interpreting here as we don't think the Fed or any central banker in office would ever frame it this way: the Fed wants to have inflation, wants to move the price level higher to bail out home owners, wants to push up nominal wages, and wants to push up nominal GDP to make the debt burden more bearable. But the Fed doesn't want the market to price in inflation, as that would push interest rates up.”
It’s a sticky situation with a whole lot of strategy, attempted brainwashing and manipulation going into every move.
Click here to read Axel Merk’s new article on Bernanke’s FOMC speech.