Hello everyone, it’s Stephan Smith here and I would like to take this time to talk briefly about the United States economy and what the Federal Reserve is doing in response to it. If you are living in the United States then it mustn’t be a shock to you when I say that the U.S. economy isn’t doing so well. According to the Federal Open Market Committee‘s [FOMC] press release on September 21st, 2010:
“…the pace of recovery in output and employment has slowed in recent months.”
Not good news at all for the states. On a more optimistic note, the U.S. economy isn’t doing as poorly as it was doing in 2009, however it is still not performing as well as the FOMC would like it to be. What’s even more interesting is inflation or should I say a lack of it. The FOMC clearly states that inflation isn’t where it should be. It is at a level below what the committee believes it should be at. The press release states:
“Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.”
That statement is powerful because it paints a picture that suggests that this current economic situation is teetering close to deflation. Now here’s why I think so. With resources in abundance due to less demand because of the contracting U.S. economy, which in of itself would lower prices naturally due to the law of supply and demand, a country would start getting close to deflation.
One thing the FED cannot do in the short to medium term is raise the Federal Funds Rate. Doing that would definitely throw the U.S. economy into a deflationary spiral. The FED must maintain its expansionary monetary policies and keep them implemented for sometime.
Another indication that the U.S economy isn’t doing well is due to the fact that the FED is willing to take extra steps to be more accommodating to the U.S recovery. Well, with the Federal Funds Rate at a all time low and with the U.S. economy stalling and inflation being at subdued levels now and well into the future, the FED, must be talking about additional quantitative easing policies.
“The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”
In light of all this information what does that mean for the U.S. Dollar [USD]? It means the USD will be weakening, big time. So I will be short the USD for sometime. Gold will continue to increase in value as investors look to protect their wealth.
The FED hasn’t performed any Quantitative Easing as of yet, for they are simply continuing to monitor the U.S. economy. Who knows, they economy may become more optimistic in the next couple of months. Some optimistic news released recently was the August 2010 employment numbers. According to the Bureau of Labor Statistics [BLS] the private sector payroll increased by 67,000. If we continue to get news like that or better, consistently, then the FED may not have to perform any Quantitative Easing. But that is unlikely. The U.S. economy has to have a major rebound to fend off deflation and to encourage growth. If not, the FED is ready for additional Quantitative Easing.
If you would like to read the entire FOMC September 21st, 2010 monetary press release, click here.
I would like to thank you for your time. I’m Stephan Smith… I’ll talk to you later.