12 August 2009 – The Aleph Blog

Redacted Version of the August FOMC Statement

Posted on 12 August 200912 August 2009 by David Merkel

June 2009	August 2009	Comments
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.	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.	They have greater confidence in a recovery in the financial markets, and that real activity is no longer falling.
Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit.	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.	Regardless of other signs of improvement, household spending is problematic ? even for those that have jobs, wages are constrained.
Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales.	Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales.	More certainty that the ?inventory correction? has likely run its course.
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.	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.	No change.
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.	No change.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability.	In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability.	No change.? Why do they even bother to say this?
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.	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.	No change.
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.	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.	No change.
In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn.	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.	No big change; October is in autumn.? Quantitative easing continues, but will slow down.? Same for the above section ? they just have more securities to buy there.
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 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.	No change.
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 Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.	No change.
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 change.

Quick Hits:

The FOMC is comforted over the recovery in the debt and equity markets.
The FOMC sees the real economy bottoming.
Very few changes, and fewer substantive changes — these two statements are the most alike of two statements in the recent past.? The FOMC is likely trying to convey that policy accomodation will not be rapidly withdrawn, and thus:
They aren’t changing any of their policies significantly now.

I’m not sure I buy their logic, but this is par for the course with the FOMC, partly because policymakers often err on the side of increasing confidence in the economy.

Living with Excluded Views

Posted on 12 August 2009 by David Merkel

1)? As I’ve said before, I don’t care whether Bernanke is reappointed or not, because who will be appointed that has a materially different theory of central banking than Bernanke?? I don’t see Ron Paul getting appointed.

But to reappoint Bernanke because a bunch of economists think it is a good idea is dumb.? The neoclassical economists were blind going into this crisis, and only a few outside the mainstream saw the debt building up, and said this would not work out well.

And, if I were in Bernanke’s shoes, I would not want endorsements from economists.? Oh wait, he is one.? Alas, I am one too, though rogue. Outside of economists, are politicians the only ones who trust economists?? Yet, the politicians use the economists as a useful shield.? “We only did what the economists suggested would bring prosperity.? We cannot be blamed if the experts are dunces.”

I think Bernanke will be reappointed.? I only hope he is there long enough to see him either struggle with stagflation, or with a Japan-style malaise, or both.? As I have said since 2004 at RealMoney, “This will not work out well.”

2)? Barack Obama is a bright guy.? He may be the brightest president since… um, I’m not sure, he might be the brightest of them all.? That does not mean that I agree with his ideas, because a bright man starting from bad postulates ends up in a bad place quicker.? That said, there seems to be some restraint on his part, as noted in this WSJ article:

In early July, the president ordered a briefing on derivatives — financial contracts that track the return on stocks, bonds, currencies or other benchmarks. Critics had been raising questions about administration proposals to regulate certain derivatives, such as credit-default swaps, which many blame in part for the financial crisis. With advisers gathered round on the Oval Office’s twin sofas, Mr. Obama said he was concerned that the administration hadn’t struck the right balance.

Its proposal called for standard derivatives to be traded on an exchange, bringing them into the open. Critics were calling the proposal too timid because it also would allow “customized” derivatives to continue trading privately. “What is to assure that this won’t drive all derivatives off the exchange?” the president asked, according to Mr. Emanuel.

He says Mr. Obama was frustrated his team wasn’t offering up a full range of views on how to approach derivatives regulation. “Get me some other people’s opinions on this,” Mr. Emanuel recalls the president as saying. “I want more than what’s in this room.”

In the end, the administration tweaked its position on derivatives. In legislative language drafted this week, it is seeking to require financial firms that offer customized derivatives to maintain higher capital cushions.

And so goes the proposed legislation.? It only tweaks at the edges the existing derivative setup, and does not question the troubles that the financial markets wreak on the cash markets when they are allowed to become gambling markets, where speculators trade with speculators, and the tail begins to wag the dog.? Synthetic markets must be smaller than the real markets, if we want to have longer-term stability.? Hedgers must lead the markets, not speculators.

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That’s all for now.? I don’t have much hope in the legislation on derivatives, or who leads the Fed.? Given where the terms of debate are, the debate excludes my views.