Merk Investments: FOMC Statement

The Federal Open Market Committee issued a very terse statement holding rates at 2% amidst the rolling crisis in domestic financial markets. The statement explicitly notes the ongoing strains in financial markets have increased significantly and the growing weakness in the labor sector. The committee opted to maintain a balanced outlook noting downside risks to growth and upside risks to inflation are of significant concern.

Whatever the Fed did today was going to be interpreted by one quarter of the market as a roll of the dice. The risks to both inflation and growth remain and we are not surprised that the Fed did not alter its inflation stance based on a single pricing report. The refusal to reduce rates in the face of the very difficult period of turmoil in the markets is a signal from the Fed that the financial community and other large firms should not expect a further socialization of losses via public institutions such as the Fed and the Treasury. The committee chose to rely on the series of innovative measures taken to provide liquidity to firms when necessary to maintain financial stability.

Of note was the fact that Dallas Fed President Fisher chose to close ranks and maintain solidarity with his colleagues on the committee. We do not think that this signals a move into the dovish category by Mr. Fisher, but is most likely attributed to the necessity of presenting a united front to the market. If anything the stiff-arm of those requesting an outsized rate cut was probably seen by Mr. Fisher as appropriate.

While, we would have preferred a more robust statement that addressed the how the FOMC plans to precede, the statement did support the bold recent move by Mr. Paulson to not bailout Lehman. However, we do hope that over the coming days that members of the Fed will begin to layout a framework for the market to understand its decision and to begin shaping expectations of what is to come in the very difficult months ahead. While, some elements of the market are visibly not pleased, we think that the statement today presents an opportunity for the FOMC to begin removing some of the moral hazard that has been introduced into the system due to the bailout of Bear Stearns.

This report was prepared by Merk Investments LLC, and reflects the current opinion of the author. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any investment product, nor provide investment advice. Merk Investments does not own any of the stocks mentioned; this is not an offer to buy or sell any security mentioned.

Merk Investments: FOMC Monetary Statement: September 2008