Federal Reserve makes it clear it’ll do what it takes to keep the US economy motoring

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Renewed stimulus seems to be very much back on the agenda giving stock market indices a boost today.

Yesterday’s weak manufacturing data from China added to the pressure on the government to intervene to hit its 7.5% GDP growth target. The PMI index dropped from 49.5 in July to 47.8 in August (anything under 50 signals contraction), the fastest fall since November.

Despite a strong US non-farm payroll number in July with the creation of 163,000 jobs, with a Presidential election year, the Federal Reserve’s FOMC (Federal Open Market Committee) seems to be ready to throw even more stimulus into the American economy. Perhaps John Paulson’s oversize bet on gold going up isn’t so fanciful?!

The minutes of the FOMC August meeting said that “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

Further QE (Quantitative Easing), where the Federal Reserve, buys Treasury bonds, seems to be very much back on the table and so interest rates look likely to be stuck at virtually zero for years to come. On QE3, “Many participants expected that such a programme could provide additional support for the economic recovery both by putting downward pressure on longer-term interest rates and by contributing to easier financial conditions more broadly.”

Unlike the Bank of England, the US Federal Reserve seems to be ready to throw the kitchen sink at making the American economy grow strongly in the short term and damn the future consequences. The Fed balance sheet is set to grow even larger based on these latest FOMC minutes. Gold bugs will be wondering when the Fed printing presses will finally lead to that long expected inflation. Not anytime soon, but surely one day… But with gold stuck in a tight range around $1,600 an ounce, betting on equities may be more profitable than the yellow metal for now, particularly if China steps up to the plate.

Contrarian investor UK


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