As expected, the Fed decided not to make any significant changes to its policies last week, keeping the interest rate at virtually zero. Additionally, the Fed announced the continuation of its Treasury buyback program, set to end in October, while deciding to slow down the pace of purchasing agency debt and mortgage backed securities – now set to be completed in March of 2010, rather than by year’s end as originally planned.

 

While acknowledging improvements in the financial markets and the housing sector, the FOMC statement sounded more cautious regarding consumer spending. No wonder – the consumer is being constrained by ongoing job losses, little income growth, lower household wealth and tight credit.

 

The fact that the Federal Reserve intends to keep interest rates at the lowest level possible for an indefinite amount of time is another indication that the economy is still very fragile. We are concerned that the Fed doesn’t appear to have any exit strategy in place as inflation potentially could come on very quickly, brought in big part by the loose monetary policy implemented around the world.

 

Oil ended last week at about $66 per barrel, falling over 8 percent last week. This was the largest weekly drop in two months, pointing to still weak energy demand and again confirming that recovery isn’t going to happen overnight.