Today’s Fed decision was no surprise, but questions abound about the timing of Bernanke’s next move.
The Federal Open Market Committee (FOMC) voted unanimously to keep the fed funds target rate between 0% and 1/4%. The wording of the statement reflected a slightly more upbeat assessment of the economy, with the observation that “economic activity has picked up.” In August, the Fed opined that “economic activity is leveling out.”
Expectations for long-term inflation were described as “stable,” which is new language and something I don’t necessarily agree with. A change to the planned purchase of agency mortgage-backed securities was also made, with the program now scheduled to end in the first quarter, instead of next month.
Today’s meeting was a no-brainer for Bernanke. All he had to do was say the economy is getting better and he wasn’t tightening policy. Give the Fed chairman credit for continuing to foreshadow his committee’s decisions.
The challenge comes next year (assuming Bernanke is officially appointed to a second term). The Fed must balance the threat of renewed inflation with the goal of achieving a prolonged recovery. Understand that the margin for error facing the Fed is huge.
On the one hand, interest rates are likely to start rising. The massive amount of Federal spending, fiscally weakened state and municipal governments and falling dollar, will eventually place upward pressure on yields. At the same time, global consumption of oil and other natural resources will increase, creating inflationary pressures.
On the other hand, the U.S. economy remains dependent on government bailouts. Just yesterday, the House passed legislation to extend unemployment benefits. Homebuilders like Lennar (LEN) have been helped by the first-time homebuyer’s tax credit, and many realtors are worried about the consequences if the program isn’t extended. The ending of the “Cash for Clunkers” program has resulted in September new car sales running at about half of the historical norm, according to Edmunds.com. Not to mention that us taxpayers still own a large chunk of General Motors, AIG (AIG), Citigroup (C) and Bank of America (BAC).
If Bernanke does get things wrong, the U.S. could face stagflation, or worse — a double-dip recession. And even if he does get things right, the recovery won’t feel like a recovery to many Americans.
As an investor, you should consider continuing to mix stocks from less-economically sensitive industries with those from industries that could benefit from an economic rebound. I would pay particular attention to those companies whose CEOs are expressing optimism about business conditions, such as General Mills (GIS) and Intel (INTC). Such a mix would allow you profit from further market upside without taking on an excessive level of risk.
Read the full analyst report on “LEN”
Read the full analyst report on “AIG”
Read the full analyst report on “C”
Read the full analyst report on “BAC”
Read the full analyst report on “GIS”
Read the full analyst report on “INTC”
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