Friday, August 12, 2011

My Reaction to the Fed Statement

The FOMC statement this week contained a time line. It said:

The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

When the S&P downgraded US debt they basically said two things. First, US finances are unsustainable in the long run. Second, the political system isn't showing any signs of fixing the problem.

By saying that they will keep interest rates low until the middle of 2013, I think the Fed is telling everyone that they agree with S&P's second point. We're going to have to go through another election cycle before the political system changes enough for the politicians to really deal with the problem.

The election will be in November, 2012 and the new government will take office in January, 2013. The Fed then gives them another 6 months to head one direction or the other.

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