As I had reported, there was a lot of discussion, argument and controversy over whether or not the Quantitative Easing programme(s) would be ended or continued. From the Fed pronouncement today (3 weeks after the meeting at which the actual FOMC discussions took place), it would very much appear that the Fed Open Market Committee has decided that they have made great strides in achieving their goal of turning the US around, and now, if pursued, might lead to inflationary pressures instead. A victory of sorts has been declared.
This does not mean (they hastened to add) that interest rates were about to be raised and that tightening would begin soon. They did say that they thought that rates should start to be raised before the Fed began to sell any of the assets which it had acquired, and that the Fed’s balance sheet should be meaningfully shrunk in the period ahead.
Apparently, there were differences at the Fed as to whether stimulus was to remain in place, with some believing that it has served to fire up commodity prices as much as anything. The decline in the past 3 weeks has been taken as evidence that less stimulus brings less commodity inflation, and the Fed is therefore hopeful that upwards pressure on food and energy will ease, and inflationary pressures brought under control.
Comment: Now comes the interesting part. As we have noted before in Japan, many years ago but at the same stage as the US is in today, when their QE programme was finished and the Bank of Japan elected to rest on its laurels, that was the end of the bull market in equities for the next 18 months. The economy slowed and it took some time before the BoJ reacted once again to get things moving again.
The skeptics in North America see that all too clearly and, given a major election in 18 months, did not think that the US Fed would follow suit. We at SAC thought it more likely than not that the Fed would ease up, if only because the political fallout from pushing the debt and deficits even further was becoming a distinct liability. We will see what transpires going forward from here, but if pursuing stimulus was likely to prove to be a liability, not pursuing stimulus – without powerful measures to bring the deficit under control – is equally likely to have similar side effects, including a weak stock market, as had occurred in Japan.
It is probably no coincidence that the bellwether NASDAQ 100 Index has traded down on the eve of the release of the minutes of this meeting. Just as this Index gave us the final push in 2008 and into an aggressively defensive position, we will now see whether it will do the same trick again in 2011. The Canadian Gold Index has done the same thing. In other words, the high tech index and the Gold stock index are at a crossroads.
So now, we wait to see what will unfold.