Federal Reserve Punts, Announces No Change in Interest Rates Till 2013

The Federal Reserve announced no changes in interest rates until 2013. Wall Street was expecting another round of stimulus or QE-III. The markets reacted sharply by moving into 10 year bonds driving yields down 2.26. With the prospects for long term profits on Wall Street ranging from 3.0% to 3.6%, inflation raging in China at 6.5%, killing any hopes that the Chinese economy could “pull” the world economy, Wall Street investors are looking for anything that is safe.

FOMC Meeting

What Bernanke officially is saying is that there will be no more federal open market committee (FOMC) moves to purchase massive amounts of private financial instruments, which is why Wall Street was somewhat stunned. Bernanke appears to be concerned about inflation and the already huge reserves held in the Federal Reserve. There is no more room, nor need for more liquidity.

Unofficially it will be interesting to see what movements the Federal Reserve does in the coming months to disguise a stealth QE-III with the purchase of other non traditional asset classes. It is not unusual for a Keynesian to “trick” the people and producers with money inflation that is not easily detected in price increases until several months latter. Keynes was a master of this in his career. Bernanke might just be taking a page out of Keynes playbook.

What this means for Main Street, USA is continued economic stagnation and decline. Banks will be unwilling to lend with a official inflation rate of 3.4% at 4.5%. The profitable spread banks need to assume private risk is not there. Banks typically like a 3% spread or 6.4% interest rate to be induced to make a significant amount of private sector loans to cover the accompanied risk involved.

For the Federal Reserve, private bank, it means they will protect their billions of low interest holdings, private and public debt, from being devalued by inflation, at least for the short term.

Planning out to 2013 is, “bold,” to some, foolish to others. Inflation is coming, China reported a 6.5% inflation rate. The Chinese central bank will have to raise interest rates form the current 6.51% to 7.5%, 8.5%, 9.5%, to fight inflation. How Bernanke thinks the US will escape substantial inflation with a declining dollar and inflation ragging worldwide is beyond me. The dollar is down 30% against the Swiss franc this year to 0.7485.

The inflation storm has already ravaged world food prices and will soon be coming to America.