Ben just disappointed the market for the first time. Whether he knew it or not he failed to beat expectations. He has been so good at managing expectations and using that as a policy tool he lost sight of how far ahead of itself the market had gotten.
……He downgraded the economy but didn’t use that as an excuse to do more. There was no new, ingenious idea. If anything they tried to clarify the commitment to hold rates low til 2013 is dependent on economic conditions remaining weak. Yet there were still 3 dissenters.
…..By disappointing some people I expect his ability to keep the market up by talking will be reduced as Investors will need to see action rather than being told vaguely that there could be action. That will take time to play out and even I have to admit he gave us something today, just not enough.
The Next Selling Wave Is About to Begin | Toby Connor | Safehaven.com
As the stock market moves down into the next daily cycle low and the selling pressure intensifies, this should drive the dollar index much higher. It remains to be seen if gold can reverse this pattern of weakness in the face of dollar strength, especially since the dollar will almost certainly be rallying violently during the intense selling pressure that is coming in the stock market.
via The Next Selling Wave Is About to Begin | Toby Connor | Safehaven.com.
When the dollar strengthens, gold normally falls. Except in times of high uncertainty (like the present), when demand for gold as a safe haven overcomes downward pressure from a stronger dollar. Buying gold at current prices is a bet that either Greece will default — a pretty safe bet — or that the Fed is again forced to use its printing press (not quite as certain).
FRB: Press Release–Federal Reserve issues FOMC statement–September 21, 2011
The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets.
………The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.
via FRB: Press Release–Federal Reserve issues FOMC statement–September 21, 2011.
Fed Shifts Bond Portfolio – WSJ.com
The Fed is trying to ease financial conditions without taking the more controversial step of increasing the amount of money that it’s pumping into the financial system, since it will be using money already generated from other programs. A bond buying program the Fed completed in June was widely criticized internally and externally because it pumped $600 billion of newly printed money into the financial system, sparking fears of inflation……..
The more potent step of launching a new round of bond purchases that would further expand the Fed’s $2.867 trillion balance sheet remains a possibility, but inflation likely would need to slow much further to spur Fed officials to take that step……..
Economists aren’t so sure that the Fed’s latest gambit will do much to spur growth.
“The odds are ‘Operation Twist’ won’t work,” Anthony Sanders, a real-estate finance professor at George Mason University, said before the Fed action. The housing market has shown no reaction to interest rates that are already at record-low levels, he said. Freddie Mac’s latest survey finds the average rate on 30-year, fixed-rate mortgages at 4.09%, the lowest level in more than 50 years.
Of course it’s right to ringfence rogue universals – Martin Wolf
Thank you, UBS. As a member of the UK’s Independent Commission on Banking, under Sir John Vickers, I could not have asked for a better illustration of the unregulatable risks to which investment banks are exposed than Thursday’s announcement of a loss of $2bn in “unauthorised trading”. No sane country can allow taxpayers to stand behind such risks.
That is the kernel of the case for ringfencing of retail banking from investment banking, recommended in the ICB’s final report.
via Of course it’s right to ringfence rogue universals – FT.com.
Treasury yields reflect market turmoil
10-Year Treasury yields fell to their lowest level in more than 50 years on Friday, responding to heightened uncertainty in Europe. The flight to safety warns of further stock market weakness in the week ahead.
Flight to safety
10-Year Treasury yields fell to a new low on Friday, warning of further falls in the stock market as investors seek save havens in Treasurys and precious metals.
Jobs Paralysis Raises Odds of Fed Action – Real Time Economics – WSJ
Job market paralysis in August increases the chance the Federal Reserve will do something new to help the economy……. The current environment is pushing the Fed towards action. A week ago, Chairman Ben Bernanke told a gathering of the world’s top economic officials he was expanding the length of the upcoming September Federal Open Market Committee to give policy makers additional time to talk about what the Fed can do, which by itself increased the odds something was going to happen.
via Jobs Paralysis Raises Odds of Fed Action – Real Time Economics – WSJ.
The Second Great Contraction – Kenneth Rogoff – Project Syndicate
…The only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, anyway, as Europe is painfully learning.
Some observers regard any suggestion of even modestly elevated inflation as a form of heresy. But Great Contractions, as opposed to recessions, are very infrequent events, occurring perhaps once every 70 or 80 years. These are times when central banks need to spend some of the credibility that they accumulate in normal times.
via The Second Great Contraction – Kenneth Rogoff – Project Syndicate.
Treasury Prices Sink As Investors Pause Ahead Of Jackson Hole – WSJ.com
The fact that buying tapered off after Wednesday’s and Tuesday’s [Treasury auction] sales underscores the attention that traders are placing on the Jackson Hole, Wyo., summit at which Bernanke will speak, betting against the prospect of some form of new bond-buying initiative…..
Troves of tepid economic data in the past few weeks had worked up hopes that the Fed would step in with some sort of disclosure at this weekend’s conference. But those expectations have died down since the start of the week as new data show the global economic recovery might not have slowed down as much as some investors thought.