My, how quickly things change!
Only two months ago, the Fed said a recovery was proceeding and there was much talk of an exit strategy. Today, the Fed surprised many and shook the markets when it changed its tune seemingly overnight announcing the “pace of economic recovery is likely to be more modest in the near term than had been anticipated.” With interest rates already near zero, the Fed has already used up its most traditional ammo of stimulating the economy by lowering rates. As a result, it has decided to take an unconvential route by plowing back their proceeds from maturing mortgages into U.S. Treasury debt, essentially just another way to inject money into the economy (well, actually, just stalling from retracting money they already injected). While this particular move is small, it underscores the reality of the struggles we’re facing and likely foreshadows the resumption of asset purchases in the future, which will hazardously expand the already ballooning federal balance sheet.
We’ve always been of the mindset that a “double dip” is coming, believing that it will simply be an extension of the same recession we began with, masked with a temporary drug injection. Technically, now that government data has shown the U.S. grew last quarter, we escaped a “double-dip” since we’ve had four consecutive quarters of growth (most people define a “double-dip” as a second recession within a year of the first). But surely everyone knows that if you strip out federal stimulus, the underlying economy has continued to deteriorate over this so-called “growing” year. So, what I’m wondering is if things are now looking worse than what the Fed had believed, or than what they had been willing to admit all along. At any rate, it looks like there are plans to start “shooting up” again…amazing how quickly perceptions change.
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