Skip to comments.Fed Funds Announcement: Gold, Housing, Stocks, Inflation, Unemployment and the Taylor Rule
Posted on 03/13/2012 11:44:46 AM PDT by whitedog57
The Federal Reserve Boards Open Market Committee will announce this afternoon whether it is keeping the Fed Funds target at current levels or doing something else. Update: as expected, no changes.
One asset class that has weighed heavily on The Feds mind is the housing market. The Fed Funds Target rate fell off the cliff in January 2008 and fallen steadily to virtually zero. But notice that home prices (as measured by FNCs 20 Metro house price index) has continued its downward path despite historically low Fed Funds Target rate and mortgage rates.
On the other hand, the S&P 500 index has down extremely since since The Fed dropped their target rate to 0.25% in December 2008. This is the cheap money rally that I have written about before.
Gold, on the other hand, has shown an excellent run-up since 2000 and is seemingly independent of Fed policy.
The Fed does not care about gold. Neither does Warren Buffett.
The Fed is thrilled by improvements in employment, so they are keeping rates low. Hmmm. At this rate of recovery in U6 uemployment, perhaps they should low The Fed Funds Rate to -2,000! [Just kidding].
Of course, inflation is something that The Fed would like to increase. The good news is that The Fed DID help to increase inflation (as measured by YoY CPI). With YoY CPI inflation at 2.9%, The Fed could back off, but I doubt it.
If we use 2.9% CPI inflation, the Taylor Rule indicates that The Fed should raise the Fed Funds rate (blue line) to 2.05%.
Not great news for savers and retirees. Perhaps they should hold a Sound Money Parade like in 1896. But instead of bankers, it should be savers and retirees.
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