The one thing that matters in the FOMC statement

Here is the latest FOMC statement. The highlights are my own. As you can see there is one single point that matter, in my view: significant downside risks to the economic outlook.

Central banks, like all public institutions behave asymmetric. This means that they are faster to lower rates than to increase them. In other words central banks will accept some inflation to help growth further. Considering this behavior for central banks is also equally hard to forecast downturns. Remember Ben Bernanke in 2007, 2008, 2009, and two months ago. Always talking about recovery. Not anymore.

Things are getting serious and the wants you to be careful. But the tools employed to deal with the second wave recessionary period in this crises are too innocent. The obsession to work on the long end of the curve is beyond me. The demand side of the economy is week and prospects of higher taxes and still big government expenditures do not help. For this policy to work US, like most countries right now, there is a need of policy mix that combines lower taxes with lower long term interest rates and credible plans to lower government expenditures.

Finally, the FED makes it clear for everyone that we are entering, if not already in, the second recessionary period in this crisis.  Act accordingly in your investments.


For immediate release

Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time.


3 thoughts on “The one thing that matters in the FOMC statement

  1. I don’t believe in the recession story. I know I must be crazy, but I prefer to wait and see it with my own eyes :). I think it depends on the expectations one had before this slowdown, which is real and normal, after some quarters of running up, and after the raw materials prices we had in the beginning of the year. The economies are not ready to support such prices, as we could see both in 2008 and now. And I like the part with the investments in equipment and software :X. Of course, this doesn’t mean I expect see an impressive rate of growth, but now, at this moment, I believe in the recovery scenario, which probably will continue, although not at rates which would make most of the people optimistic. 🙂

    1. It is always an option to remain upbeat in the face of peril . There is always a good chance the storm will pass you by, but it does not cost you anything to get down in the basement until it passes. As I see it right now the world is already in a recession. The second one in this crisis. It is unwise to fight the market instead of waiting to invest after the storm has passed.

  2. This is a prudent advice, and I agree with you that in the short horizon the Mr Market is unhappy. In a longer run I’m more afraid of a banking crisis in the BRICs, may be next year, than a recession in the developed world. Because I don’t understand what sort of a recession is that supposed to be, as they are already down :).

    I spent my morning doing again some calculation about their debt and the FED implication and I can’t understand what sort of a game are they playing. You say here that they plan to buy 400 bn, and in august they asked the congress to be allowed to borrow 2400bn. If you make the proportion is 16,66%. It’s around the level that FED usually keeps in their book from the total US debt held in public hands. The only difference is that until the crisis they bought most on the debt in the primary market, at auctions, but not only, they were also in the secondary market, and now they buy less at auctions and more from the market.

    But something doesn’t make sense. Is clear that they made the shit to the secondary market to better manipulate the yields. But how low do they want these yields to be, for the 10-30y?! It’s already very low. The 30y maturity was that low only in december 2008 and at the beginning of 2009 in the whole history. If a recession and an more important market drop are on their way, this means that more people will make the flight to safety, and the yield will go even lower than that. So it’s not logical for the FED to come in the market now. If they estimate they should do it until june 2012 this means they don’t see such a very bad scenario. But they see the reverse, people going off gov secs, into more risky assets. Because if the bad scenario is real, then the 30y yield should get somewhere to 2. Which is totally freak :). And, btw, why would you wanna take off the downward from the lower maturities if you see a recession?!

    I’ll wait for the companies to see their result in october, and then I’ll decide what part I will get, because now nothing is clear to me, the signals are freak :).

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