While most market observers continue to believe that the Federal Reserve remains on hold as far as the eye can see, our admittedly rose-colored outlook detects several baby steps towards a rate hike by mid-2010. Yesterday's FOMC Statement says, "Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months.... Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability."
The Fed continues, "With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
Finally, they say, "In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve's special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve's announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility.... The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth."
In other news, the Investment Company Institute recently issued the statement, "ICI Statement on House Passage of Regulatory Reform Bill," which says, "ICI President and CEO Paul Schott Stevens made the following comment on the House of Representatives' approval of H.R. 4173, a bill designed to reform the nation's financial regulatory system: ICI supports modernization of the U.S. financial services regulatory framework.... However, a number of provisions included in the House-passed bill must be addressed as the legislative process continues. Among other things, the bill, in its current form, could subject mutual funds to wholly inappropriate forms of bank-like regulation were regulators, however improbably, to deem mutual funds to be a source of 'systemic risk.' In addition, the bill could unfairly require mutual funds and their shareholders to contribute to a dissolution fund for failing financial institutions. Mutual funds do not and cannot 'fail' in a manner that would require payments to funds or their shareholders out of any such dissolution fund. We look forward to continuing to work with Congress to resolve these issues."
But The Wall Street Journal says in "Fund Industry Bristles at Bill," "Not everyone is persuaded by ICI's arguments. The fund group's refusal to acknowledge that money-market funds could fairly fall under the new rules undermines its broader arguments, said Mercer Bullard, associate professor at the University of Mississippi School of Law and president of Fund Democracy, an advocacy group for mutual-fund shareholders."
