Federal Reserve Leaves Rates Unchanged

i guess there is something in me that has always been strong.the summary of economic projections, which we’ll have those ranges that steve just talked about. this is an exciting day for many participants, certainly for me. it’s going to give the creditmarkets the most transparent scan of the fed’s brain it has ever had. and what used to be deciphered 20 years ago by nuanced open market procedures will now be displayed in terms of individual targets like steve said in the open air. so let’s get ready. ken? qe-2.5 seems like a new audi model. that said, are you as excited about this fed meeting as bill is? do you think this is a seminal meeting? a change from what we’ve seen? i don’t think it’s as big as it’s made out to be. i think it’ll be helpful to see the dispersion of the members. but it’s like any committee. people on one side and people on the other. and ultimately it’ll be interesting to see if the preponderance of them have fed funds unchanged into 2014. i don’t think they’re going to take — i don’t think they’re going to change the mid-2013.because the way it’s phrased, at least mid-2013, which works fine with a 2014 increase. you think — i don’t think — more flexibility than some would think based on that language? yeah, i do. because at least through mid. doing something in 2014 is at least through mid 2013. steve or bill, i’ll go to bill first, what inflation rockets? what if inflation takes off? at least until mid 2013 locks them in for another year and a half. el with, inflation is a key consideration as is unemployment. i mean, at the moment the fed has projected 1.7% to 2% as the inflationary target so to speak. that may be changing as steve has indicated. but we won’t see that, i don’t think, until the minute three weeks from now — no change in interest rates. no change in interest rates. the committee decided today to keep the target branch of the fed fund rates at 0% to .25%, anticipates that economic conditions including low rates of utilization and a subdued outlook are likely to warrant exceptionally low levels to the fed funds rate at least through late 2014. on the economy, information received since the last open market committee meeting in december suggests the economy has been expanding moderately, notwithstanding slowing in global growth. indicators point to some further improvement to overall labor market agreements, household spending has continued to advance, but growth in fixed investment has slowed. the housing sector remains depressed. inflation has been subdued in recent months. longer term inflation expectations have remained stable. the committee seeks to maximize the employment stability, economic growth over the comingquarters to be modest and consequently anticipate that theunemployment rate will decline only gradually toward levels thecommittee judges to be consistent with its dual mandate.strains in global financial markets continue to pose significant downside risk to the economic outlook. committee also anticipates that over the coming quarters inflation will run at levels or below those consistent with the dual mandate.committee also deciding to continue its program of extending the average maturity of holdings of securities as announced in september. it’s maintaining the existing policies of reinvestingprincipal payments from holding of agency debt and agencymortgage backed securities and agency mortgage back securities and rolling over maturing treasury securities at auction. the committee will regularly review the size and competition of its securities holdings and is prepared to adjust those holdings to promote a stronger economic recovery. there was one dissenting jeff over the time period which economic conditions are likely to warrant exceptionally low levels a the the feds fund rate. this is hampton pearson reporting live from the treasury meeting. you heard it. in fact, i’m looking at thestatement now, going through it very quickly. i’ve got the statement from december 13th in front of me. steve liesman, this is a cut-and-paste fed. this statement is word-for-word with the exception of the mid-2013 to late 2014 swap. that’s it. you have it right. and that’s — that’s why the double barrel lead. the first is the wow on the extension, not just to mid-2014, but to late 2014. i would love to see what’s happening in treasury marketsright now. i think it would consider as almost additional qe. it took another leg off of a five-year, was a 2 1/2 year, now it’s going to be a 1 1/2 year. i have to think it’s a powerful effect. it has been in the past. the second barrel to my lead there, brian, is that they are not buying into the stronger growth story. the cut-and-paste thing is the right observation. there’s no real enhancement of the language there to speak of. they’re still in this moderate growth, they don’t believe in anything sort of north of 2.5% or 2% when i read that language. yeah, we’re going to bring you gary shilling. bill gross, first to you, i’m looking at the ten-year. what do you make of this statement? exactly the same, but they are stretching it out, very dovish to late 2014.very dovish. this is qe-2.5. we may see in march and latermaybe, you know, qe-3, but this is basically an easing of policyall the way through 2014. it suggests to the marketplace that not only will the fed eventually buy additional securities, but it will keep this policy rate constant at 25 basis points for two, three,four, perhaps even five years. and what does it do to themarket? it basically — it basically signifies that the front end ofthe curve, the twos, threes, fours, and fives will do well. that five-year auctioned at 90 basis points an hour ago is probably now at 84, 83, 82 basis points because the fed’s on hold for a longer period of time. gary — bill, 79. 79. down ten dips. it’s a much bigger effect. 79 basis points. gary shilling, sounds like the fed might be listening to you. i know you remain negative on the economy. and listen, almost every data point we’ve gotten has beaten expectations, the job market is slowly getting better, housing is getting better. the fed seems to me is saying, hey, we’re looking out and the data may be getting better, but we’re nervous. well, remember, a year ago the fed and us and very few others said that the inflation was a commodity bubble and it was going to go away and that proved to be the case and howthe fed is being cautious and so are we. we had that blip in consumer spending late last year, but it wasn’t substantiated by income growth and consumer spending is easing off as of december, i think that’s going to go negative. i’m looking for a moderate recession in this country. but another thing on this, you know, i think we’ve got another five to seven years of the age of deleveraging. that’s a title of my recent book. we’re into this and the fed extending here is no great surprise because i think they’re seeing the same thing, that this deleveraging among u.s. consumers and the financial sector on a global basis and then the european problems hard landing in china, you put this together and it’s going to be a long, long slog. and you must agree with that because the first line from your latest federal note is that the fed is slightly more concerned about the economic outlook than was implied by the december 13thstatement. no, i think that’s right. in the short run, i would expectsomewhat negative reaction over the next week or two,undoubtedly the markets will focus on the fed’s economicoutlook, the sort of signaling effect, if you will. there’s always this dynamic from equity market participants that, hey, the fed may know something about the economy and european situation that we don’t know. so that will be a point of concern. if we get to qe-3, i would view that only as a short-term positive, but if gary’s right and we’re going to have rates pegged at zero for three to five years, this is — this is a big problem for the equity market inmy opinion. why? why is it a big problem for stocks? well, look, we don’t have a lot of precedent around this, but when you go back to the last serious period of financial repression, because that risk-free rate was pegged, the equity risk premium kept getting wider and wider and wider. inflation volatility picked up,not the absolute level all the time, but volatility picked up. and the p/e multiple just continued to compress until economic conditions were warranted normalization of fed policy. i think a financial repression environment bad for the banking system, not great for multiples, equity risk premiums will be wide. and until we get out of this, there’s no justification. rick santelli, your thoughts on this. even more prolonged at cheap money environment. well, i think this statement tells me, welcome to japan. and that the u.s. has a company credit card, and i think that what’s going on if you want to be clinical and objective isthat the fed is making sure we can finance our big debt for avery long time. markets, dollar gave up all its gains, two-year note yields dropped several basis points, the old five-year that we’re currently trading is down at 78, closed at 90 yesterday, it was around 85 borrow the statement. the new five-year reauction for under 90 is about 81 1/2 basis points now. the only maturity that isn’t moving lower is the one the fed’s actually buying on the twist and that’s the 30-year bond. we’re going to take a quick.