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Federal Reserve tapers more, stocks rise

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On June 18, the Federal Open Market Committee issued a statement saying that they would continue to reduce the $45 billion monthly debasement of the US dollar, which is carried out by purchasing additional agency mortgage-backed securities at a pace of $20 billion per month and longer-term treasury securities at a pace of $25 billion per month. This will be decreased to $35 billion per month beginning in July, and will consist of purchasing additional agency mortgage-backed securities at a pace of $15 billion per month and longer-term treasury securities at a pace of $20 billion per month. The Committee also decided to keep the target range for short-term interest rates at 0 to 0.25 percent, reaffirming its view that “a highly accommodative stance of monetary policy remains appropriate.”

“I don’t see the kinds of broad trends that would suggest to me that the level of financial stability risks has risen above a moderate level,” Yellen said in her news conference.

Stock markets reacted positively on the afternoon of June 18, with the Dow Jones Industrial Average gaining 98.13 points (0.58 percent) to 16,906.62. The NASDAQ Composite Index rose 25.60 points (0.59 percent) to 4,362.84, its highest level since April 7, 2000. The S&P 500 index rose 14.99 points (0.77 percent) to 1,956.98, a record high. Gold rose $4.50 (0.35 percent) to $1,277.20 per ounce. Crude oil rose $0.44 (0.42 percent) to $106.41 per barrel.

Other details released on Wednesday show that the Fed's inflation of the monetary supply is not having their desired effect of increasing prices at a rate of 2 percent per year, with their latest projections predicting increases of 1.5-1.7 percent for 2014, 1.5-2.0 percent for 2015, 1.6-2.0 percent for 2016, and 2.0 percent beyond 2016. The projected annual growth in gross domestic product (GDP) for 2014 was revised downward from the March projection, dropping to 2.1-2.3 percent. The 2015 and 2016 projections were not revised from 3.0-3.2 percent and 2.5-3.0 percent, respectively. Longer term projections were revised slightly downward.

These projections would seem to indicate that the current policies of the Fed are not helping the economy to recover, and are merely sustaining it artificially. The Keynesian school of economics explains this through the concept of a liquidity trap, while the Austrian school of economics explains this through the concept of malinvestment.

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