The Federal Reserve released the following statement after its meeting today. It is presented along with the previous statement, and my interpretation of the differences on a paragraph-by-paragraph basis.
“Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks.
“Household spending has continued to show signs of 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, but are making progress in bringing inventory stocks into better alignment with sales.
“Although economic activity is likely to remain weak for a time, 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.”
“Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months.
“Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales.
“Although economic activity is likely to remain weak for a time, 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.”
The Fed is marginally more positive on the economy. “Leveling out” is better than “the pace of contraction slowing,” implying that the contraction has actually stopped. The improved conditions in financial markets have lasted and the trend is still in the right direction (notice the change from weeks to months).
Household spending (aka consumption) has stopped falling off a cliff but is still very depressed, and for good reason — lack of income as people are out of work and less accumulated wealth due to the housing market decline (the decline in the stock market has been partially recouped, but stock market wealth is far more concentrated amongst the wealthy than is housing wealth).
No change in the statement about businesses. A swing in inventories will probably be the first spark in an economic recovery, but while welcome, that would not be enough to create a sustained recovery.
No change in the rest of the statement, which pretty much says that the economy will be anemic for a very long time, but that the enormous amount of money being thrown at it from both the fiscal and monetary ends will eventually get some traction and lift us out of this morass.
“The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.”
“The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.”
Translation: headline inflation will be much higher than core inflation, but headline inflation does not matter to you since you don’t eat or drive. The key point is that there will not be a wage price spiral since the wage side of that will not gain any economic traction.
If you ask your boss for a raise, he will probably point you to the door. What headline inflation there is will result in a reduction in the real standards of living for the vast majority of people. No change from last time.
“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 continues to anticipate 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 is in the process of buying $300 billion of Treasury securities.
“To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. 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.”
“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 continues to anticipate 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 monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.”
The Fed has been very active in buying up both treasuries and GSE — Fannie Mae (FNM) and Freddie Mac (FRE) — backed mortgage paper. It is almost out of ammo from its previously announced plan. The big news is that they did not decide to expand the program.
On the mortgage-backed side, the Fed has been the dominant player in that market since the program was announced, accounting for well over 50% of the volume. Without the Fed action, mortgage rates would be substantially higher, and the housing market would be in even deeper doo-doo than it is now.
Big question: when the Fed stops, does the housing market fall apart again? It would be premature to speculate on how the Fed will dispose of this mountain of paper it is holding, but the immediate question is if there is a real market for it if the Fed is not buying hand over fist.
“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.”
“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.”
No official dissention among the members of the board. Every one is playing nice, at both this meeting and the last one. That is not unusual.
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Read the full analyst report on “FRE”
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