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« An update from Jim Rogers | Main | The Federal Reserve: The Greatest Scam in History (revision C) the Yellen Effect »

The Federal Reserve: No Change to Rates for an Extended Period

USD Chart 17 March 2010.JPG

The balancing act continues as the Federal Reserve holds interest rates and hints at an "extended period" of the no change policy. As we write the US Dollar has moved lower to trade at 79.64 on the US Dollar Index with gold moving higher to trade at $1128.00/oz at the close on the NYSE.

No joy or encouragement here for savers as the dollar returns next to nothing at the moment. If you look hard enough at the alternatives you can get close to 5% on the Australian or New Zealand dollar, which have been strengthening against the US Dollar over the last year or so.

The dilemma for the Fed is one of balancing a gentle withdrawal of excess cash out the system without taking the patient off life support too early and is summed up very well by this snippet from MarketWatch

WASHINGTON (MarketWatch) -- The Federal Reserve kept its benchmark interest rate at a record low level Tuesday and made no changes to the key "extended period" policy pledge, a signal that it believes the economy still needs support to get to a sustainable path.

Altering the wording would be a clear signal that the Fed is more sanguine about the economic outlook and believes ultra-low rates are no longer necessary -- and financial markets would react accordingly.

The Fed's policy statement, released after a closed-door meeting, said the economic situation is "likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Brian Bethune, economist at HIS Global Insight said the statement was designed to calm markets that any change in interest rate policy was imminent. At the moment, the Fed is walking bit of a tightrope, Bethune said.

One the one hand, the Fed has been winding down its emergency funding programs as the economy has recovered and Fed officials have been talking in great detail about how the central bank will be able to exit from its zero-interest rate policy before inflation pressures emerge.

On the other hand, the central bank doesn't want to tighten prematurely, which could kill the housing market and lead to more woes at the nation's crippled banking sector.

"The Fed...has to avoid being stampeded into a short-term tightening which would be a disaster," Bethune said.

It will be interesting to see just how gold performs as it reaches the $1140/oz level which we see as the next resistance point, gold may back off and try again later, however, if it goes through this level then we would expect a decent rally to ensue, just our humble opinion.

Have a good one.

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Reader Comments (2)

the FED has been generating the most consistent trading signals ever. Back in may 2008 the Fed said "strong dollar" and it was the most powerful buy signal on the dollar that generated about 3000 pips of profit. Now the FED said it is going to stop buying mortgages. This is the strongest sell signal on the stock market. It is also a signal to buy bonds, because the bonds are gonna go up in price for an "extended period". Keep looking at the FED, the FED is your friend.

March 17, 2010 | Unregistered CommenterDi

The same Fed that bailed out our "friends" on Wall Street, including the bullion banks? Sure pal.

March 17, 2010 | Unregistered CommenterSnakeman

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