Tuesday, October 12, 2010

FOMC Minutes Give QE2 The Green Light

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The Fed released it's Sept FOMC minutes today @ 2pm. link

The Federal Reserve is leaning toward taking two steps to boost the economy: Buying more Treasury bonds to drive down loan rates, and signaling an openness to higher prices later to encourage more spending now. Fed policymakers also spoke at their last meeting about setting a higher inflation target, hoping that would get people to spend more money in short run. As a matter of fact they mentioned 'Inflation' 24 times throughout the minutes and 'Disinflation' only once.
The minutes showed the Fed was concerned that the economy was growing slower than they had expected. While Fed officials didn't see the economy slipping back into a recession, they worried it had become vulnerable to "potential negative shocks." They expressed concerns that unemployment, which has been at 9.6 percent for the past months, would stay elevated.

Publicly Fed officials since the September 21 meeting have suggested the program will be smaller than the $1.7 trillion one it initiated during the recession. Under that program, the Fed purchased a mix of mortgage securities and government debt. The effort was credited with forcing down mortgages rates and providing support to the weakened housing market.

In recent remarks, two Fed officials have suggested the new purchases shouldn't exceed $500 billion.

At the September meeting, some Fed officials thought the economic benefit of the debt purchases could be "small." A smaller program isn't expected to lower rates as much as the Fed's crisis-era program did, economists say. Also, there's concern that even cheaper loans will fail to get people and companies to ramp up their spending. Thus far, they haven't been confident enough in the economy or their own financial prospects to do so.

The question now remains, have the markets factored in a large QE dollar amount? If so will the Fed highly expected move then disappoint and incur a sell off?

Barton Biggs, managing partner at Traxis Partners, tells CNBC he expects the S&P 500 to move up another 10 to 15%.

Discussing what we can expect from these sideways markets through earnings season, with Jeff deGraaf, head of technical analysis research at ISI.

Back in July Itz noted the similarities the S&P 500 had to the '03/'04 period >>LINK

On Sept. 1st & through out the month Itz had noted the 'Inverse Head & Shoulders Pattern' on the S&P500, calling for a completion target of 1,200+ (Itz target 1,225) >>LINK

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