When the Fed Starts Taking the Money Away...

When the Fed Starts Taking the Money Away...

You have to love how the U.S. government does things. The Federal Reserve has just said that the U.S. recovery is underway.

Now walk with me on this one:

Earlier this year the stock market was in the crapper, we were giving billions of dollars to banks to keep them operating, the entire world was like, should we get rid of dollars? Buy gold? What do we do now? And people in the U.S. started losing their formerly secure career-track jobs. Beyond that, manufacturing and related jobs started disappearing when there was nobody buying the stuff anymore, and now unemployment rates are still up around 10%. Interest rates are at basically zero, which means you can borrow money from the government for nothing- if you’re big enough to borrow money from the government. Those of us who are regular people still have to pay interest rates to the banks, of course. And those higher fees to the credit card companies and everything.

But the recovery is underway- so sayeth the Federal Reserve. Now, the Federal Reserve isn’t actually part of the Federal government, it’s a separate, private institution set up to keep the government from being in control of the money directly. But for all functioning purposes, it’s part of the government.

They have promised to hold interest rates low for a long time and will slow but continue their purchase of mortgage debt so that the program extends through Spring 2010.

"Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn," the Fed said in a statement. "Conditions in financial markets have improved further and activity in the housing sector has increased.”

This is all part of Bernake’s challenge to slowly wean the financial world off the teat of the Fed. It will be a tough balancing act in a time where people are touch and go with finances. The Dow dropped 81 points just because people are afraid any changes the Fed makes will ruin the progress. For a country that likes to pretend we are financially independent and argue against socialist tendencies in the healthcare reform movement, what a bunch of whiners when we go to take the financial subsidies out from under otherwise-destroyed financial district. It reminds me of when I lived in Alaska, the number one federally subsidized state and also the one where people pride themselves so deeply on being independent.

"I think it confirms that the economy still needs a little bit of help and that rates aren't going to go up anytime soon," said Alan Lancz at Alan B. Lancz & Associates in Toledo, Ohio.

"There's still a lot of problems with mortgages, the housing market in general as well as the banking sector," said Dan Faretta, a market strategist at Lind-Waldock.

I’m sure the approach by the Fed will be gradual, that changes will cause see-sawing in the market and in the value of things- the secret will be to see if Bernake and co. can find the sweet spot. I like this as a first move. Keep interest rates where they are, slow down the debt purchases to draw it out and not do anything else too quickly. Should be good for now.