Like a 47%-er excitedly cashing his government welfare check, Wall Street rejoiced with a wild rally today in response to the U.S. central bank's surprise announcement that it will continue to supply big banks and corporations with more cheap money. The Federal Reserve Bank's Open Market Committee decided to wait for more definitive signals that the health of the U.S. economy is sufficiently strong enough to be taken off of Dr. Bernanke's life-support system of easy money. Today's Fed statement indicated that the government will maintain its ongoing program - called "quantitative easing" (QE) - whereby the Nation's central bank buys back its own U.S. Treasury debt ($85 billion per month) at artificially high prices even though it has no money to make such purchases. The statement also said that there would be no change in the Federal Funds rate - the rate at which very large banks can borrow money. This rate will remain near zero. Only the folks on Wall Street can borrow at this rate, unfortunately; the rest of us on Main Street cannot.
What happened? The market was expecting a tapering of the Fed's bond purchases because of what the government has been describing as a growing economy with little inflation. However, floor traders in the Chicago CME interest rate futures pits suspect that the economy is not that sound. In his post-announcement press conference (view video of press conference at above, left), Bernanke seemed to be resigned to the idea that in spite of almost five years of "printing" money via QE and maintaining artificially low interest rates, the the U.S. economy is still too weak to survive on its own. In the mean time, Wall Street profits and stock prices soared to new record highs on the announcement.
At one point the Fed Chairman was asked if the pending fiscal fights in Congress over the debt ceiling and the new health care laws had any bearing on the decision. Mr. Bernanke admitted that the Fed may need to react to such an event or any other that would require a stimulus from the central bank. When asked about the possible influence of recent news about a replacement given his pending resignation, Bernanke declined to comment. The chairman also expressed concern that the unemployment rate had only declined to 7.3% over the past five years and conceded that the rate is somewhat distorted because of the aging population and a significant number of people who have dropped out of the work force meaning it may actually be higher. He further added that no interest rate "tightening" would occur - so far as the Fed can influence it - until the unemployment rate fell below 6.5% which he said might take another two years.
There seemed to be a sense of frustration over the plight of the Middle Class. The QE stimulus program has pumped hundreds of millions of dollars into Wall Street but very little has trickled down to Main Street. Bernanke acknowledged a struggling and dwindling Middle Class where 15 percent of Americans now live in poverty in spite of massive government welfare payments. Chairman Bernanke also commented on a potential inflation bubble and stated that the Fed's primary focus was the labor force and the unemployment rate. He maintained that inflation at less than two percent is under control and not a problem. The Feds measure inflation currently at around one and a half percent but they exclude food and gasoline prices - which is great for people who don't eat and don't drive.
The battered U.S. dollar, suffered another mauling with today's announcement and all dollar-denominated commodities shot up in price - especially gold and other precious metals. Bernanke did not mention the U.S. dollar and was not asked about it by the press. After an initial euphoric response to the positive reaction of Wall Street stock prices, the press and most market participants seemed to walk away disheartened from the day's events wondering if the economy is really as strong as we are led to believe.
Well, if nothing else, Wall Street had a good day.