The Fed Translated….
Yep, it’s that time again. The Fed met yesterday and today and came out with their announcement this afternoon at 2:15 pm. I promise that this one won’t be as long as the last Fed Translated was.
As usual, my comments are in bold and italics…..
April 29, 2009
For Immediate Release:
Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. The downhill slope is less steep than it was. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. We aren’t going to see a substantial turn around in the economy soon. A weak, ambivalent turn around, probably, but not a strong return to growth. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. What else could they say but to say that they anticipate that what they are doing will eventually work? Would the markets be happy if they said, “We don’t have a clue whether what we’re doing is going to work?” Nope.
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. They don’t say for how long, but I’m going to say that I think we’ve got 12 to 18 months until we start seeing a rapid spike in inflation and a rapid jump in interest rates. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. Let’s look at that for a minute. They think that inflation would be lower than is healthy for a while and so…. So they are going to do what they can to spur things on and encourage inflation – which brings up the possibility that they’ll stir up inflation that they can’t “control.” Kind of scary…..
In these circumstances, the Federal Reserve will employ all available 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 anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, 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 up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. 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 facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of financial and economic developments. They are going to continue to do what they’ve been doing because: 1) They don’t want to take the step that they are trying to avoid which is to overhaul the banking system and 2) If they aren’t willing to take the big steps with Bank of America, Citibank and others, they have nothing else they can do.
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.
Tom here….. So what do I expect the Fed’s statement will do to the markets? Actually, probably very little. We might see a little more volatility in the next few days but I expect that we’ll see more volatility and turmoil out of the results of the banking stress test than we will out of this statement.