The Federal Open Market Committee released a statement summarizing its day and a half of deliberations, saying it sees “a return to moderate economic growth following a pause late last year. Labor markets have shown improvement in recent months, but the unemployment rate remains elevated…the housing sector has strengthened further, but fiscal policy has become more restrictive.” It is a message of some improvement, a new headwind, and unchanged monetary policy. The Committee will continue monthly purchases of $85 billion.
On the heel of Cypriot bank-deposit delirium, we suspect that the US central bankers had more than enough concern to hold firm to the seemingly limitless flow of monetary easing.
Last weekend the European Central Bank cooked up a plan to provide Cyprus with a necessary bailout but required that all bank deposits be taxed at a rate of up to 10%. Imagine waking-up to your morning paper explaining that 10% of your bank accounts had just been confiscated. Because of the weekend, citizens rushed to ATMs and withdrew everything they could. When this lead balloon sent crash reverberations around the world, Cypriot banks remained closed and may reopen on Thursday.
In other Central Bank activity, the results of stress tests were released for US banks with all but a very few doing well. When we consider what really allowed markets to recover in spring 2009, we recognize that the concoction and execution of the bank stress tests really turned the tide. Upon closer and calmer reflection, it was a time when faith and trust in the US banking system was in decline. Using the vehicle of a stress test that was only generally defined (and for which the detailed results were never made clear), the Federal Reserve told the world that the banking system was sound, and we believed them. In essence, our take is that the Federal Reserve, as the lender of last resort, properly resorted at a moment of extremis to lend its trust and confidence to the banks. It was much more important than money.
The ECB came very close to undermining the trust and good faith of the European banking system. It may have been one of the worst blunders in its history. Though they have averted the blunder for the time being, their reputation has suffered for even considering it. The ECB has called into question the sanctity of bank deposits. Can this genie be put back in the bottle?
As the Federal Reserve’s balance sheet approaches $4 trillion and deficit spending continues, investors are happy. Addicts are always happy when the drugs and booze are plenty and the consequences nil. Keep up the intake, avoid death and morning, and they’re all set!
Markets renewed their rally after the Cyprus and FOMC news passed. Bonds fell, while stocks, commodities and the Euro dollar rose.
When conditions are this conditional, there is no reason to swing for the fences. Investors must understand what they own, why they own it, and what makes it valuable. This is easier said than done. This market seems intent on moving higher. We are nervous but don’t hear any large lasses singing.