Fed minutes continue to tantalise investors…

Ben Bernanke, Chairman of FOMC

Following a lacklustre start to the main session in the US today, equity markets closed on a strong note following the FED Minutes release.

According to the FED Minutes, the open market committee is concerned with the current growth pace of the US economy, similarly with consumer spending and unemployment not showing, in their assesment, any clear signs of recovery and also deeming the housing sector still depressed. The statement says that intervention may occur “fairly soon” unless the latest economic data points to a “substantial and sustainable strengthening in the pace of economic recovery”. The latest non-farm payrolls have been positive but still behind the 200,000 pace that is considered to be necessary to bring down the unemployment rate. Initial jobless claims have also stagnated below the 400k mark. Finally, recent GDP numbers are still far below where both Obama and Bernanke would like them to be.

The Minutes suggest there is a growing number of members supporting further action. This is in contrast the June meeting where only a few members were seen in favor of further monetary easing. The FED members agree that a bond-buying program (Quantitative Easing) would help expand the economic recovery by pressuring down long-term interest rates even further and so boosting business and consumer confidence and leading to an increase in investment. Other options, besides an additional bond-buying program were also explored by FED members, including keeping interest rates low for a prolonged period of time and lowering the interest rate that the FED pays banks for parking money overnight.

After two quantitative easing programs and with interest rates near zero, the effectiveness of further intervention is likely to be limited however and this is why Bernanke has been delaying the “evil day” as much as he can. With the current rise that equities have been experiencing, the FED may try to further delay QE3 and so tantalise markets more without actually delivering. However, at some point they either have to sh*t or get of the pot…  If Fed fails to announce action, a blood bath is likely to occur.

We believe that any further strength in the long end of the yield curve is an incremental gift to short.

Filipe R Costa