Wednesday, September 23, 2009

FOMC Statement

Below is the FOMC statement where, amazingly, they do not say a word about the fact that money supply is not growing. They do discuss an eventual strategy for winding down of their agency mortgage-backed securities purchase program. I say eventual, since they will be buying a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt, over the next few months. It is not immediately clear how much of this is simply rolling over of previous loans into purchases, and how much are new purchases. To the degree, they are new purchases, it appears it will be an inflationary move, since it would be difficult to further sterilize purchases without pushing rates higher. I'll be researching this point over the next few days to see if I can get further data from the Fed. Stay tuned. Here's the statement.

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
UPDATE: According to Morgan Stanley the Fed's mortgage backed securities program is not a new program, but a continuation of the on-going purchase plan, which ends at the end of December 2010.

The Fed has purchased $857 billion of their scheduled $1.25 trillion in mortgage-backed securities, according to Morgan Stanley. It's also bought $129.2 billion of the planned $200 billion in so-called agency debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks, which finance mortgage purchases.

This makes a lot more sense than a new program, although the Fed statement doesn't make clear that this is a continuation.

A continuation is obviously not as inflationary because the numbers are a lot smaller, and could be sterilized if the Fed chose to do so.

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