Posts Tagged ‘FOMC’

Fed Chairman Ben Bernanke has stated the recession is probably over.  Does he believe it?  If so, is there any chance the statement at the conclusion of the Federal Open Market Committee (FOMC) meeting will change tone dramatically?  Or, even more exciting; will the target rate raise off the 0-25 basis point level? What would the markets do?

Initially, I believe the futures would sell off hard from the shock, but wouldn’t a rate rise be the vote of confidence that the recovery is upon us from the highest financial power in the land?

I don’t believe for a second that the target rate will be changed today in the face of 10% unemployment, but it is time to start thinking about what the reaction will be when the money spigot begins to be turned off.

Yesterday, an article by Liz Capo McCormick on Bloomberg stated, “The Federal Reserve has started talks with bond dealers about withdrawing the unprecedented amount of cash injected into the financial system the last two years, according to people with knowledge of the discussions.”

This withdraw of the cash from the system would be in the form of repurchase agreements, aka “reverse repos”.  A reverse repo drains cash or liquidity from the banking system as the Fed sells securities to its 18 primary dealer banks for a specified period of time.

So the end of easy money is somewhere in the future.  The balancing act of when, and how much, the Fed takes will be the greatest challenge. The goal will likely be to stem inflation before it returns without choking off the delicate economic, and so far, job-less recovery.

Photo by TW Collins