MLR - PMP 10/30/14
Major averages finished fractionally lower yesterday on higher volume. The Fed ended QE3, made no mention of QE4, but maintained its policy of unusually low interest rates. The Fed also did not mention weakness in Europe's economies thus probably believes the US can continue on its own momentum even if Europe falls into a recession for the third time since 2009. The Fed did say it believes it less likely that inflation will persist below 2% as demand should increase thus spur wage growth and a rise in prices. “Solid job gains and a lower unemployment rate, and a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing," according to the Fed's statement.
By contrast, Greenspan said that the Fed’s quantitative easing has failed to spur demand and inflation is “dead in the water” because effective demand is “dead in the water." Banks have been parking the reserves at the central bank which doesn't promote economic activity. There is much economic uncertainty in the US and abroad as the viability of the euro remains in question. These issues create a risk-off situation that hinders investment and economic activity and thus the market can, perhaps at best, hope for a painfully slow recovery.
Markets reacted to the Fed announcement in rip-tide fashion but managed to finish the day in the top 1/2 to 1/4 of respective trading ranges. Market action going forward will be revealing. Futures are currently trading lower as markets realize there in no QE safety net when it ends tomorrow. That said, in the bullish camp is the belief that the economy is improving thus the Fed can take a firmer hard with respect to QE. Unfortunately, signs of a truly improving economy are scant. Should the market correct beyond 10% as it did after QE1 and QE2 ended, the Fed will most likely step in and discuss launching a form of money printing such as QE4 or operation twist 2.
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