Just hours after the Commerce Department reported the first decline in quarterly GDP in 3-1/2 years, the Federal Reserve announced it was maintaining its policy of near-zero interest rates and $85 billion worth of long-term Treasury and mortgage-backed purchases per month.
The Fed said this policy was consistent with its dual mandate to foster maximum employment and price stability, and it repeated its statement from the December meeting that it expects to keep rates near zero “so long as the unemployment rate remains above 6.5%.”
The Fed said recent economic information suggests that “growth in economic activity paused in recent months” due to “weather-related disruptions and other transitory factors” but household and business spending had grown and housing continued to improve. "Employment also expanded but “unemployment remains elevated,” the Fed said.
Stocks fell slightly but bonds were unchanged immediately after the statement.
Michael Pento, president of Pento Portfolio Strategies and author of the forthcoming book The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market, tells The Daily Ticker that the Fed’s easing policy “is wrong.” He says, “It would be much better to rip the Band-Aid off…allow a cathartic depression to engulf the United States for about a year…and we will emerge on the other side of that clean, with a strong currency and a sound balance sheet.”
But instead, Pento expects the Fed “will continue to monetize debt and may even increase it.”
The danger in this policy, says Pento, is that it is enabling “the federal government to run trillion-dollar-plus deficits — about 7 percent of GDP per annum…robbing the middle class of their purchasing power…creating bubble after bubble.”
He says the bubble will eventually burst because the Fed will stop buying securities or the market will push up interest rates or inflation will increase.
In the meantime, he advises investors not to fight the Fed. Pento turned bullish on stocks on the first day of trading this year. He says stocks could retreat temporarily — “we’re overextended on the very short-term” — but that dip would be a buying opportunity.