Tail Chasing At the Fed

The Federal Open Market Committee announced at the end of its June meeting on the 24th that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”  This implies they are not seeing any imminent sign of inflation looming just ahead, but they also made no reference to any significant deflationary pressures either.  This will not increase the odds that investors in money markets and short-term CDs will see any improvement in their earnings. We have seen an increase in long-term rates of late and that was addressed in their statement as follows: “…to provide support to mortgage and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn.”  It will be interesting to see how they combat the inevitable inflationary expectations such a massive monetary injection will nurture.  It’s as if the more securities they buy back, the more the potential for dollar degradation increases, resulting in a negative feedback loop that keeps pressuring longer-term rates upward.