No Surprises from the Fed

We highlight Marriott International, Inc. (MAR - Analyst Report) and Fifth Third Bancorp (FITB - Analyst Report).

There were no surprises from the Fed. The target for the fed funds rate was unchanged, the economy is still a concern and the central bank's balance sheet is being expanded.

Stabilization of the credit markets and the economy remains the focus of the Fed. Today's statement shows that the Federal Open Market Committee remains willing to risk high inflation in the years ahead if that means avoiding deflation now. Given the prevailing conditions, this is the right move.

Even though the first-quarter GDP report had some bright spots -- such as the improvement in consumer spending and the decline in inventories -- it was an awful report. The recession is marching on.

Yes, we are seeing many signs the rate of deterioration has slowed, but the economy is still going downhill. The Fed alluded to this in its statement, opining that "the economy has continued to contract, [but] the pace of contraction appears to be somewhat slower."

Given this backdrop, the Fed has no choice but to pursue a strategy of artificially driving down interest rates.

The takeaway for investors is that the Fed is going to do whatever is necessary to avoid a depression. We are in uncharted waters, as there has never been this level of stimulus thrown at the economy, particularly this early into a severe recession. To the extent the policy enables the economy to recover, investors will benefit.

However, now is not the time to take on excessive risk. Be selective about what you buy and use strategies such as dollar-cost averaging.

What we don't know is how the Fed will eventually unwind its strategy of strong stimulus. The central bank kept its plan of buying up to $1.25 trillion of agency mortgage-backed securities, up to $200 billion of agency debt and up to $300 billion of Treasury securities. We also don't know the exit strategy for TARP or the various other Treasury plans.

But for now, deflation and a worsening recession remain the primary risk. And while shares of Marriott (MAR - Analyst Report) and Fifth Third Bank (FITB - Analyst Report) are trading up today, the ongoing economic and credit issues could easily drag them right back down tomorrow.

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