The Federal Reserve met yesterday and today and Ben Bernanke held a press conference, which is a new gig designed to fight off Fed critics. The FOMC said that it is keeping rates the same. Of course, this is in reference to the Fed funds rate, which is almost at zero. But the Fed is not really controlling that rate right now anyway because most of the banks do not need to borrow overnight money because they have a massive pile of excess reserves from all of the quantitative easing.
Other than some little changes in their forecasts for growth and inflation, there was not much new coming from the Fed. Bernanke is saying that the Fed will continue to reinvest expiring bonds. This means that the money supply should remain stable with the ending of QE2. He did not make any promises for a QE3 and that is probably the reason that the stock market pulled back today.
It should not matter what one man says or does. It should not matter what one small committee does. Unfortunately, because they control the money supply of the money that is used in the largest economy on the planet, every little word by Bernanke has an effect. It shouldn't be this way, but it is. Therefore, as investors, even if we don't like the central bank, we still have to pay close attention to what it is doing.
It is impossible to predict what the Fed will do next. If I had to guess, I think the most likely scenario is that they keep the monetary base steady for the next few months. When the stock market does poorly, the economy continues to struggle, and unemployment doesn't get any better, then the Fed will have an excuse to go forward with QE3.
Meanwhile, we have to continue to monitor all of the variables in our world. There is continuing war, there are revolutions going on in the Middle East, there is a disaster still going on in Japan, there is the good possibility of default by Greece and other European countries, and there is the health of the economy in the U.S. There are a lot of things that could go wrong right now and any one thing could trigger a financial panic. Continue to play it safe with your money. Playing it safe means putting a good chunk of money in the permanent portfolio and the rest in cash, gold, and silver (or equivalents).
We will also continue to monitor the adjusted monetary base and the excess reserves held by banks. This will clue us in if we should expect serious price inflation in the next several months.