The Fed is not ready for its exit strategy yet. It is certainly not raising interest rates.

 

Moreover, reversing course, at the Federal Open Market Committee meeting yesterday, the central bank board opted to buy $2.05 trillion of securities, noting that ‘the pace of the recovery is likely to be more modest in the near-term than had been anticipated’. The Fed will reinvest principal payments from its maturing portfolio of mortgage-backed securities and agency debt in long-term Treasurys at current levels. For the first time it is using a number target.

 

The tone of the FOMC statement was more cautious than in June, as soft economic data in the intervening period created fears of a double dip. Unemployment remain stubbornly high, sapping spending. Housing prices are soft. However Thomas Hoenig, president of the Kansas Federal Reserve Bank,opposed the decision to buy T-bills, arguing that the recovery was on track.

The stock market reacted positively, but not very and foreign markets are down today, but not very. The dollar fell modestly but recovered today. Gold sort of went up after a pre-FOMC fall and also reversed in moderate European trading today. Except for farmers in Kansas, it is vacation time, folks.

 

Tomorrow I’m celebrating the Glorious 12th . There will be no blog, to mark the opening of the grouse-hunting season. Nor for obvious reasons will there be one on Friday the 13th . I am flying off for a 5-day trip to the upper reaches of the Rio Douro (where port wine comes from). Frida Ghitis will be on duty early next week in case something happens while I am in the mountains of northeast Portugal visiting convents, stately homes, castles, and, of all things, a village up against the Spanish border whose inhabitants continued to practice rudimentary Judaism in secret from the 15th century when the Inquisition began in Portugal from Spain right until the 1920s when a Polish-Jewish dam engineer discovered them. Since then they learned about rabbis, cantors, bar-mitzvahs, and gefillte fish.

 

Note that there also will be no weekend update of our performance tables (for paid subscribers). Apologies to Tom McClellan for again getting the name of his publication wrong yesterday. It is McClellan Market Report and you buy it at www.mcoscillator.com

 

Fund flow trackers EPFR of Cambridge MA write:

Against a backdrop of disappointing US employment, manufacturing and housing markets data, investors steered their cash into emerging markets funds during early August as they sought protection from the dollar weakness they believe will follow. Flows into EPFR Global-tracked emerging markets equity funds hit a 38-week high during the seven days ending August 4, with global emerging markets equity funds having their best week since late 4Q08, while emerging markets bond dunds took in over $600 mn for the ninth consecutive week.

The prospect of fresh measures by the US Federal Reserve to stimulate credit, which include keeping interest rates extremely low, also helped high yield bond funds and real estate and commodity sector funds post strong inflows and prompted investors to take another look at Europe. The implications for yen-dollar exchange rates, however, ensured another week of outflows for Japan equity funds.

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