Thursday, February 19, 2009

Gloom and Doom: The Federal Reserve

The Federal Reserve has revised down its economic outlook for 2009, and warned that the U.S.
is likely to face an especially gradual and prolonged period of recovery once it finally claws its way out of a deep global recession. Minutes from the FOMC’s late January meeting released today show that the Committee predicted the economy will contract this year by 0.5 to 1.3%, and that unemployment will rise to between 8.5 and 8.8%.
The nation’s steep declines in housing, trade, industrial production, spending, and employment rates are expected to overwhelm the government’s stimulus plans as currently proposed.

• Treasuries tumbled across the curve today as the Federal Reserve signaled it does not intend to buy U.S. securities to lower consumer borrowing costs anytime soon. 30-year bonds were little changed throughout most of the day until release of the January 28th FOMC minutes indicated the wait-and-see position. The Committee believes that buying mortgage-backed bonds and agency debt is more likely to have a positive effect on credit markets.
• Tomorrow the government will announce the size of next week’s 2-, 5-, and 7-year note auctions. Market observers expect the total to be $97 billion, coming on the heels of last week’s record $67 billion sale.
• At the market close: UST 10-yrs down to yield 2.76%. UST 2-yrs down to yield 0.95%. USD$$ slightly stronger at $1.2546 vs. the euro and stronger at $93.695 vs. the yen. Gold up strongly to $984.90/ounce. Oil relatively unchanged at $34.62/barrel.

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