FED twists again, no QE, credit growth OK

The most popular heading for reading the tea leaves of the FED decision yesterday was: the FED twists again or let us twist again.


That was the most important decision: the Twist Operation will be extended to the end of the year. The pace will be slower because of not enough material present of which the duration can be extended. After finishing it becomes almost impossible to sterilise QE.

No QE yet, so the market was a bit dissatisfied. What they should do with the interest rate was no question: they have promised long ago to keep the rates at 0%, even while half of the FED members see higher interest rates. Several hawks have lowered their estimates for 2014, see chart of Capital Economics.

There is still an Albanese majority that in the long run the FED rate ought to be c. 4% (so there is some reason in Solvency II to hope for rates in the long run of 4%+).

The FED reduced their forecasts for growth (see chart Ecompic) and inflation for 2012 and especially 2013.

That caused to expect that the unemployment rate will decline "only slowly" dalen in instead of the "gradually" they hoped in the previous FED statements. The FED is sinning against its dual mandate in every prospect: the unemployment rate stays too high and inflation will be too low. Still they didn’t took the bazooka of QE3.  

The implied inflation expectations are net yet at the desired level of 1.8% as Bianco stated to deserve QE3. They want to keep the powder dry for when the other central banks will throw lots of liquidity. At least in Jackson Hole Bernanke will tell that the FED has to be more aggressive; Yesterday he told the FED is:  “prepared to take further action”

The chart of Sober Look shows that some things are developing very well in the eyes of the FED: since about August 2011 credit growth is becoming really good. That will show up soon in better investment growth (after the fall back of no bonus depreciation in Q1 that did cost business $50B).