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December 15, 2010 at 06:07 AM
Analysts weighed in on the Federal Open Market Committee's (FOMC) decision Tuesday to move ahead with its $600 billion quantitative easing plan, saying the need for job creation in the United States overrides any other economic concern, especially since inflation is just a distant fear for now.
– Jeffrey Kleintop, chief market strategist for independent broker-dealer LPL Financial in Boston, believed that repeating their message reinforces the Federal Reserve’s commitment to QE2 in the face of political pressure and their above-average targets for economic growth in 2011. And, he noted, the unemployment rate is higher now than it was at the time of the FOMC’s November meeting, while core inflation is lower and below 1%.
“This is a slight negative for stocks and Treasuries given the disappointment by some investors at the Fed not increasing their purchases to offset the added issuance in 2011 by the Treasury to fund the tax cut deal. This does not change our views on the markets or economy, which is for modest growth next year. Clearly, the Fed likes to move at a deliberate pace. It is too soon for the Fed to alter the pace of QE2 which began to be implemented only six weeks ago,” Kleintop said.
– Axel Merk, president and chief investment officer for Merk Funds, Palo Alto, Calif., said he has little doubt that the Federal Reserve will succeed in raising inflation expectations. The risk is that the Fed will get more than it is bargaining for.
“In the current environment, current inflation may be low, but future inflation expectations are not; until Fed Chairman Ben Bernanke's August speech, future inflation expectations were within historical norms. Since then, however, future inflation expectations have been moving up to levels we believe are not consistent with price stability,” Merk said.
– Doug Roberts, chief investment strategist for ChannelCapitalResearch.com, Shrewsbury, N.J., was unsurprised by the FOMC’s stay-the-course announcement.
Roberts noted that Bernanke maintained his “usual pattern” of disclosing any new or potentially controversial moves in speeches or interviews rather than FOMC statements. Bernanke wants FOMC statements to be confirmations of the Fed’s existing positions, thus averting disruptions in the financial markets, Roberts said.
“The Fed will clearly maintain its easy money stance until employment improves substantially. The only item that might possibly change this is a substantial increase in inflation. This is consistent with the Fed’s dual mandate of price stability and full employment,” Roberts said.
