Bernanke-Rally Killer
Research for Online Investors

by John Dalt

6/22/11

The Federal Open Market Committee (FOMC) finished their two day meeting, and released their statement just before lunch today. Interest rates were kept the same, and the Fed maintained the policy of keeping interest rates “at exceptionally low levels for an extended period of time.” The FOMC reduced their forecast for GDP growth in the U.S economy from the range given in April.

After that meeting the Fed estimated GDP growth of 3.1 to 3.3 percent in 2011 and 3.5 to 4.2 percent in 2012.  The U.S. economy grew at 1.8% in the first quarter, and most economists estimate the second quarter to record an annualized 2% rate.  The Fed will release their new forecasts tomorrow.

The Fed believes the slowdown in economic growth is largely attributable to ‘temporary’ factors.  Higher commodity prices and supply disruptions due to the Japanese earthquake were cited as factors that would diminish with time.  Confirmation was given that the $600 billion bond buying program known as QE2 would end on schedule this month.  This brings the Fed’s total purchases of treasuries and mortgage securities to $2.3 trillion since 2008.

The Fed statement committed to reinvesting proceeds from maturing bonds.  This means the Fed will continue buying Treasuries to hold interest rates down.  They will not shrink their balance sheet.  After the last meeting Bernanke said it would take at least two meetings to change this policy.  Starting to reduce the Fed’s balance sheet would be the first step to tightening money supply and increasing interest rates.

The FOMC statement classified the recovery in hiring as “weaker than anticipated.”  This was a change from the language used in the April statement that viewed the labor market as “improving gradually.”  May unemployment climbed to 9.1%.

The market moved lower while Chairman Bernanke held his press conference.  The dip seemed to occur when he answered a question if there had been discussions about further treasury purchases.  He answered that QE2 was instituted because of fears of deflation and that danger has been reduced.  This answer seemed to slam the door on the possibility of QE3, something traders want.

Bernanke addressed the negotiations in Washington over raising the debt ceiling.  He said that drastic cuts in government spending would not spur growth in the economy.  His attitude was that deficit spending was a long term problem and would take time to correct.  He also addressed the eurozone credit problems, saying a Greek default would “roil the world’s credit markets” and that the Fed had been kept well informed of the actions concerning Greece.

Today...Ben Bernanke was a rally killer!

The mailbag:
Regulations that I support are sensible, promote safety and enable a civil society.  I am going to give you the benefit of the doubt that your rejoinder does not mean you tolerate thievery, exploitation and fraud as part of part of the mean marketplace in which we must compete, including with China whose war-like trade tactics has served them well.  They have a lot of our jobs, a lot of our money and several generations of Americans, most unborn, as their dedicated debtors scheduled to send them US dollars for their lifetimes.  China's vastly improved living standards are welcome but they are not a miracle.  It's what happens when resources are made available to the private sector to create wealth.—subscriber J.R.

John’s reply:  My point was the trade-off between regulations and the perceived safety of big brother watching out for us.  Without the perceived safety of large police forces, Food and Drug Administrations, EPA etc we would be a little more responsible for ourselves.  On guard so to speak.  I may have been inartful in my wording.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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