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Thursday, September 13, 2012 12:23 PM

Desperation Bazooka Tactics; Gold Soars Following Huge Headfake

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The Fed came out blazing today with desperation bazooka tactics, not that it will matter one iota to jobs or housing (because it won't).

Specifically, the Fed announced it would ...

  • Increase Mortgage Backed Securities (MBS) at Pace of $40 Billion Per Month
  • Extend Operation Twist
  • Increase  Longer-Term Securities by Total of $85 Billion Per Month Through December
  • Keep the target range for the federal funds rate at 0 to 1/4 percent 
  • Anticipate that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

Please consider a few snips from the FOMC Official Press Release.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.  The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.  In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
Desperation Bazooka Tactics

This seems like desperation bazooka tactics. Specifically, the Fed is in a panic state over jobs.

It also leaves me wondering, if this does not work (and it won't), what else can the Fed do?

Promise to hold rates low forever? Buy every treasury and agency?

Gold's Response

After the market makers cleared every stop to the downside, gold blasted higher.

That is one hell of a downside headfake, to the tune of $40, after which gold moved $75 in the other direction.

US Dollar's Response

Curiously, the US dollar barely budged in comparison, but is heading lower after initial wild gyrations in both directions.

In contrast, gold never looked back following the initial and certainly unwarranted $40 drop.


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