Leveling out has never felt so good. Whether you where looking for the Fed to announce a clear end or an expansion of quantitative easing in yesterday's eagerly anticipated Fed Statement, you really did not get either. I guess what you really got is a quantitative ease off.
After the Federal Open Market Committee pronounced that economic activity is "leveling out" the Fed announced that they would not expand or subtract from their quantitative easing program and they still plan to buy in total up to $300 billion of Treasuries, $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. Yet at the same time they signaled that if perhaps the economy continues to improve, it is possible that maybe, just maybe, the number of purchases may not be needed at a future date, or then again, maybe so. The Fed said that in an effort, "t o promote a smooth transition in markets" they will gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.
In other words for the first time since 2006 the Fed is making a move to ease off the economic stimulus accelerator. Oh sure the way the Fed did it was typically Fed-ish. They signaled that perhaps quantitative easing might be nearing an end but then again maybe not. In one single Fed statement the Fed changed the economic world as we have known it and in another way they changed nothing and left the door open to market interpretation. It is clear that the Fed is moving in the direction of removing this historic rash of economic stimulus but reserves the right to change its mind at anytime. One hand it is committed to trying to ease off of the quantitative stimulus but doing it so gradually so as not to rattle a market that has been addicted to a world pumped up with printed money. The Fed commitment was sort of like the smoker saying they are probably going to quit smoking after they finish this last carton of cigarettes yet they are going to smoke less to drag out the day they have to go cold turkey. And who knows, by the time that rolls around if it feels like we can't quite make that commitment, there is a possibility that we may have to buy another carton and try to quit again at a later date. The Fed does not want to take the quantitative crutch away from the market place yet it is hoping that perhaps they can continue the slowing pace of purchases and perhaps not spend all the money by the end of the year. They want to wean the market off of this easing and so they can quit before the market know that it has. The Fed says it, "anticipates that the full amount will be purchased by the end of October", but then again if economic numbers continue to improve perhaps they will not. In fact it is possible that those purchases will be pushed off into next year and may not happen at all. If the Fed fund futures are telling us right, we will see rates start going up maybe as early as February and for sure by April of 2010.
While the long term of the yield curve seemed to know that the low rate party is over, the short end vagueness in the Fed statement made the short end more murky. That also means more uncertainty in the dollar. There is no doubt that a reversal of quantitative easing is dollar bullish and oil bearish yet the lack of clarity and uncertain questions of when and if the easing would end left the dollar bears and oil bulls room for speculation. If the Fed said that QE would end in October, the story would be over but know the oil bulls have hope that perhaps the lack of commitment to a target date means that if you think economic data might get bad again the Fed may have to back off its withdrawal. The market may also believe that the Fed is not moving fast enough to remove the stimulus and that may feed into inflation. Oil is surging on just that as commodities and the dollar are going in an inflationary direction.
Republished with permission from Alaron's Energy Report Daily.