Blog : No FOMC News Is Good News

by Ed Zwirn on June 19th, 2013

Today's Federal Open Markets Committee statement revealed only nuanced changes to monetary policy, with the upshot being that the market for everything from penny stocks to blue chips will continue to be supported by a strong flow of money from the Federal Reserve Bank.

After the end of its last meeting on May 1, the FOMC voted not only for the continuance of the Fed's $85 billion monthly purchases of mortgage-backed securities and Treasury bonds, but also left open the possibility it may up the ante, guaranteeing a steady stream of money to chase a limited number of assets ranging from penny stocks to savings bonds.

"The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes," today's statement says in a word-for-word reiteration of May 1.

But penny stock investors should be aware of some subtle changes versus what the FOMC said six weeks ago. In its obligatory line about inflation, the policy-setting arm of the Fed repeated what it had said about inflation "running somewhat below the Committee's longer-run objective," but said that this was partly reflective of "transitory influences."

In another revealing insertion, today's FOMC statement noted that downside risks to the outlook for the economy have "diminished since the fall."

Fed watchers should also note evidence of an increasing split within the Committee. While the May 1 policy statement had been approved by an 11-to-one vote, there is apparently one more dissenter, with both nay votes coming from members who believe that the Fed should do more to rein in inflation.

Going forward, the FOMC said it still expects to use the bond purchases and "other policy tools as appropriate" until there is a substantial improvement in the labor market and that "a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens."

In addition, the Committee said it expects to keep the current federal funds rate target at between 0% and 0.25% for as long as the unemployment rate remains above 6.5% and inflation between one and two years ahead is projected to be no more than half a percentage point above the Fed's 2% target. And this will probably allow time for a long runup in your penny stock portfolio.

With the official unemployment rate at 7.6% for May and the core consumer price index, which excludes food and energy, up only 0.2%, the Fed has given its accommodation program a long leash before these numbers would prompt a monetary tightening, and penny stock investors and others deciding on which stocks to buy or sell should be taking note.

The message for penny stock investors is clear. Penny stocks and other assets will continue being chased by Fed money and the prospect of any tightening on the part of the Fed remains as remote as it can be, and the penny stock party remains likely to continue.