Mr. Mojo Risin’, got to keep on risin’.
The Doors, “L.A. Woman”
Today the Federal Open Market committee met and as many anticipated, they delivered more juice to the markets. Not to outdone by the ECB, the committee used weakness in labor markets as their cover to begin purchasing $40 billion in mortgage backed securities per month, along with their normal Operation Twist activities. Between the two programs the Fed will purchase about $85 billion of bonds per month in an attempt to “put downward pressure on longer term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.” Perhaps even more important is that the Fed issued a warning that if the outlook for the labor market doesn’t improve, they could up the ante and employ other policy tools.
Why unleash this wave of reflation in an election year? It could be that the Fed is worried about the fiscal cliff and wants to give the economy a boost in a year where the fiscal arm is immobilized. It could be that they want to dampen mortgage rates and encourage the housing market to keep healing since it could potentially have a huge multiplier effect on the economy. It could be that the combination of weakening Asian and European growth rates have the chairman worried that they could spread to U.S shores. Or it could just be that Chairman Bernanke has had it with the structural aspects of unemployment, and is looking to break the vicious cycle that has developed within the labor force.
No matter what the root cause, the Fed and other central banks have unleashed a reflationary wave that is affecting asset prices across the globe. No one can be sure what will eventually come of this helicopter drop of money, but instead of fighting it, investors may be better off embracing the positive asset inflation while it lasts. Eventually the other side of cheap money will be felt; but for the next few months this may just keep the mojo rising in financial markets.