Blog : Weak Tea for the Fed

by Ed Zwirn on July 31st, 2013

Penny stock investors who like to read tea leaves have been given scant new information from today's statement by the Federal Reserve's Open Markets Committee, the group of governors that decide U.S. central bank monetary policy.

In a statement that overwhelmingly reproduced the last FOMC statement, which was issued on June 19, the governors reiterated both their assessment of the U.S. economy and their commitment to an expansive monetary policy that ought to continue to boost penny stock investments for the near-term future.

This policy includes an $85 million monthly bond buying program, which the Fed again promised to continue (and possibly increase) "until the outlook for the labor market has improved substantially in a context of price stability." In addition, the Fed said it would continue to keep its target rate for federal funds between zero and 0.25% as long as the unemployment rate remains above 6.5% (the last reading, for June, was 7.6%) and inflation between one and two years is projected at no more than 2.5%.

There were some nuances: The FOMC characterized U.S. economic expansion as having been "modest" over H1 (versus their earlier use of the word "moderate" for the performance through May 31). The statement, while reiterating their statement that the housing market had been strengthening, threw in a caution that "mortgage rates have risen somewhat" since June 19.

Possibly more revealing for penny stock investors is the increasing unanimity of the FOMC regarding monetary stimulus. Eleven of the 12 FOMC members voted for the statement, as opposed to 10 the last time around. The lone holdout was Esther L. George, who expressed concern about the program's influence on inflation.

It is this unanimity that ought to prove most reassuring to penny stock investors. Ben Bernanke's second (and final) term as Fed chairman ends on Jan. 31, 2014, and investors apparently love him and his monetary policy enough that they reacted badly last week when the name of Larry Summers, a noted critic of this policy, was floated by the White House as a Bernanke successor.

Most traders apparently think this is scare mongering meant to pave the way for an easy confirmation for the true front runner, Janet Yellin, who everybody agrees is much less likely to pull the plug. If this take on things proves accurate, this means that the Fed will continue to pump money into the economy as per the guidelines it has already laid out, especially given the fact that the Fed governors (including Bernanke himself, who will remain as a governor) are all on record in support of this pumping.