With unexpected weakness in the economy after $2 trillion monetary injection and near zero interest rates, the Fed and economists have become extremely wary of exiting this recession. First the first time in history after a large monetary support of the system, we still have failed to escape further doldrums but add to the debt burden for future generations.
Speculation is mounting that the Federal Reserve could announce additional Quantitative Easing (QE) measures — where central banks use tactics other than interest rates to increase the money supply — on Tuesday when it decides on interest rates. If the committee decides on more asset purchases, the amount would be at least $1 trillion.
On the monetary side, the possibilities include additional purchases of (Treasurys) and mortgage-backed securities, as well as TALF-like structures — i.e., special purpose vehicles that lend to non-banks using equity provided by the Treasury and debt provided by the Fed.
Other options may include additional buying of Treasuries or mortgage-backed securities but does not yet have the backing of the entire Federal Open Market Committee, which will probably need to see more data before signing off on such a move.
On the fiscal side, we hope that Congress passes the extension of emergency unemployment insurance, continued aid to state and local governments, and at least a temporary extension of the bulk of the 2001/2003 tax cuts beyond the end of 2010. Although it is a fairly close call, we now expect the FOMC to announce that they will reinvest the pay down of mortgage-backed securities in the bond market at next Tuesday’s meeting. This would be a ‘baby step’ in the direction of renewed unconventional easing, although it would probably be packaged as a decision to prevent a gradual tightening of the overall stance.”
Treasury Debt
The Fed resorted to direct bond purchases, also known as quantitative easing, as part of its response to the world financial crisis. The central bank in March ended its emergency purchases of $1.425 trillion of housing debt after completing purchases of $300 billion in Treasury securities in October. The U.S. central bank’s target for the overnight lending rate is at a record low. Gold, which pays no interest, becomes a more attractive investment when borrowing costs fall, eroding returns on cash.
Gold may benefit from both low interest rates and safe- haven demand.
Goldman Sachs Group Inc. cut its growth outlook for the U.S. and Japan, and economists said a report tomorrow will show China’s exports rose at a slower pace.
Bullion may remain supported by a weaker dollar. New York-based head of commodity research with Morgan Stanley, wrote in an Aug. 8 report. The U.S. currency has dropped 9.6 percent against the euro in the past two months.
Assets in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, were unchanged at 1,282.75 metric tons on Aug. 6, according to the company’s website. Holdings have been little changed since dropping 18.55 tons on July 28, the most in more than two years.
Silver for September delivery in New York added 0.1 percent to $18.495 an ounce. Platinum for October delivery was 0.8 percent lower at $1,558 an ounce. Palladium for September delivery fell 0.3 percent to $486.25 an ounce.
SOURCE: WALL STREET GRAND JOURNAL.
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