It is rare that we have the Federal Reserve Board reporting on the economy and a State of the Union Address in the same week, let alone the same day. Yet, that is just what happened last week. First the Fed met and released a statement. The fact that they left rates where they were was no surprise as said that they will "stay the course" and keep rates low despite the fact that the economy is starting to recover. The Fed repeated its earlier forecast that conditions are "likely to warrant exceptionally low levels of the federal funds rate for an extended period." There is no indication that the recovery will be anything but moderate and fragile and increasing rates now could put this recovery in jeopardy. The Fed did say that they will let some stimulus measures expire, including halting their purchase of securities backed by home loans. Potentially, this could cause rates to increase on these loans if the markets can't absorb the supply.
The State of the Union Address also did not contain many surprises. The President's focus was jobs. The recovery can't sustain itself until it starts to produce jobs. While we were losing hundreds of thousands of jobs on a monthly basis 12 months ago and the losses are much lower now, the economy must start creating jobs. This is a tall order, especially considering the fact that we have already spent trillions trying to rescue the economy from oblivion. There are just not enough resources left to provide significant future stimulus. It is expected that future measures will be very specific and focused upon job creation, such as the proposed employee tax credit specifically for small businesses. If last year was a year of survival, this year will be the year of making sure we build a strong foundation to sustain a long-term economic recovery. The market's initial reaction to the government's statements were not positive when mixed in with other news, partially because they have heard this song before. One day later, the strong 4th quarter preliminary economic growth figures released did not reverse that negative trend. Look for the employment numbers due to be released at the end of this week as the next big statistical release.
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