The Fed is Not Your Friend

08/13/09 Baltimore, Maryland

Mark your calendars… the Fed has promised to stop manipulating the bond market by October.

That’s the meat of the news from yesterday’s Federal Open Market Committee meeting. They will “gradually slow” the pace of its official Treasury purchases, but the $300 billion program will now run through October instead of ending in September, as the Fed had previously scheduled.

(Of course, as our friend Chuck Butler often points out, that’s just the official word. The Fed has other ways to skin this cat. For example, they’re rumored to be striking deals with primary dealers for post-auction purchases. Instead of making official bond purchases at the auction, the Fed will have a primary dealer buy the bonds and then sell them to the Fed… same debt monetization, but without that pesky “transparency” and media attention.)

Outside of the Treasury bond announcement, the FOMC statement was about what you’d expect: Interest rates were left at 0% and will remain “exceptionally low” for an “extended period.” While “economic activity is leveling out,” it will “likely remain weak for some time.” And, of course, “inflation will remain subdued for some time.”

“The Fed doesn’t exist to help you,” says our currency man Bill Jenkins.

“Central banks do not exist for the good of economies. They do not exist for the good of citizens. Their sole purpose is to keep the game going, and to profit from it as long as possible. After that, they clear out, leaving the taxpayers to pay off their debts. Their protection and enhancement of economies and citizens is just a means to an end. As long as it helps the profits roll in, helping others is fine. But in the end, they will foist responsibility to others.

“For us, we will trade with all this in mind as each bank assesses its role in the global finance arena… knowing that they will begin raising rates as soon as possible, and sometimes even before. When they do, it will give us huge opportunities to profit. Rising rates almost always guarantee soaring currencies.

“Particularly I would look for the U.S. dollar, Europe, Aussie and United Kingdom. Australia will provide the real runaway as long as China can get some exports up and running. If this recovery gets some legs (which is still problematic in my mind), they already have the upper hand with an interest rate multiple times higher than the others.”

Ian Mathias

Ian Mathias is managing editor of The 5 Min. Forecast. We discovered Ian working as a full time rock climbing guide and writing on the side. As it turns out, markets and global economics can be extreme too… at least enough to keep him around. Since working for Agora Financial, respected media outlets including Forbes.com, the Associated Press, Yahoo, and MSN Money have syndicated his writing. He received his BA from Loyola College in Maryland and is currently studying writing at the graduate level.

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