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Wednesday, September 23, 2009

Fed talks up recovery, but is it real?

The Federal Reserve is highlighting signs of recovery as officials leave benchmark interest rates unchanged; The FOMC has voted 10-1 to keep the target fed-funds rates at 0% to 0.25%.

There's also talk that the Fed will wind down its enormous MBS and housing agency bond purchases, according to Bloomberg and the Wall Street Journal. The FOMC will extend their program out to 2010 while slowing the pace of purchases in order to provide a "smooth transition" to the markets.

So we started the week off with a debate over Jim Grant's call for a snappy recovery, and now we have some more economic happy talk from the Fed. Despite tent cities cropping up all over the United States, the stock market (and long participants) seems happy. And why not?

From Bloomberg, "Stocks Extend Gains...":

"Equities have surged since March as the Group of 20 nations committed about $12 trillion to revive economic growth and the Fed kept overnight borrowing costs near zero to unlock credit markets.

The 58 percent rally in the S&P 500 since March 9 has left the gauge trading at about 20 times its companies’ reported profits from continuing operations, the highest level since 2004, according to data compiled by Bloomberg."

$12 trillion. That's the amount of money that has been thrown at this crisis. For now, the unprecedented liquidity infusion seems to be doing its work, keeping asset prices aloft. We may even continue to see higher stock prices here in the US for a time, but have we really left this crisis behind?

Related articles and posts:

1. Marc Faber: "Nothing has been solved" - Tech Ticker.

2. The Pinocchio Recovery - Market Talk.