Day: November 4, 2009

November 2009 Redacted FOMC Statement

November 2009 Redacted FOMC Statement

September
2009
November
2009
Comments

Information received since the
Federal Open Market Committee met in August suggests
that economic activity has picked up following its severe
downturn
.

Information received since the
Federal Open Market Committee met in September suggests
that economic activity has continued to pick up.

Little change; they see the rebound as
continuing.

Conditions in financial markets have improved further, and activity in the housing sector
has increased.

Conditions in financial markets were roughly unchanged, on balance, over the
intermeeting period.
Activity in the housing sector has increased over recent months.

That said, the stock market has stopped
rallying. Does the FOMC only look at the stock market, and not notice how
much risky bond spreads have rallied?
Household spending seems to be stabilizing,
but remains constrained by ongoing job losses, sluggish income growth, lower
housing wealth, and tight credit.
Household spending appears to be expanding
but remains constrained by ongoing job losses, sluggish income growth, lower
housing wealth, and tight credit.
No change
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.
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.
No change

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.
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.
No change
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.
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.
No change.
The Fed assumes stagflation is not possible.
In these circumstances, the Federal Reserve
will continue to employ a wide range of tools to promote economic recovery
and to preserve price stability.
In these circumstances, the Federal Reserve
will continue to employ a wide range of tools to promote economic recovery
and to preserve price stability.
No change.
Why is this paragraph needed?

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, including low rates of
resource utilization, subdued inflation trends, and stable inflation
expectations
, are likely to warrant exceptionally low levels of
the federal funds rate for an extended period.
Gives us a clue as to when they will change
policy. Look at labor unemployment,
capacity utilization, current inflation readings, and future inflation implied
by TIPS.

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.
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 about $175 billion of agency debt. The amount of agency debt
purchases, while somewhat less than the previously announced maximum of $200
billion, is consistent with the recent path of purchases and reflects the
limited availability 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.
In order to promote a smooth transition in
markets, the Committee will gradually slow the pace of its
purchases of both agency debt and agency mortgage-backed
securities
and anticipates that these transactions will be
executed by the end of the first quarter of 2010.
No real change.
As previously announced, the Federal
Reserve?s purchases of $300?billion of Treasury securities will be completed
by the end of October 2009.
Treasury program is done.
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.
Another useless paragraph.



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.
Another useless paragraph.
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

Comments


1) No big deal on fewer Agencies being bought. But what if they decide to do the same to mortgage bonds? They see the bloat building up on the Fed?s balance sheet, and they are beginning to wonder how they will unwind it. The first part is easy, but it gets hard fast.

?
2) Gives us a clue as to when they will change policy. Look at:

o Labor unemployment

o Capacity utilization

o Current inflation readings

o Future inflation implied by TIPS

?
3) The FOMC appears to only look at the stock market when reading financial? conditions. Bond spreads have rallied.

?
4) The FOMC assumes that stagflation will not happen again, or that their quantitative easing does not put us in a Japan-style liquidity trap.

My Visit to the US Treasury, Part 2

My Visit to the US Treasury, Part 2

Before I start this evening, to all my fellow bloggers out there, if you were invited to the gathering at the US Treasury and did not come, I have a request and a question:

  • If you were invited, send me an e-mail.
  • Tell me why you decided not to come, if you would.

If present trends continue, I can tell you that bloggers are not pushovers for the US Treasury, but neither are they deaf or heartless.? Since my last post, here are the responses to the gathering:

As all bloggers there will note, those from the Treasury were kind, intelligent, funny… they were real people, unlike the common tendency to demonize those in DC.? As for me, I live near DC, and I am an economic libertarian, but I have many friends at many levels inside our bloated government.

They have to do their jobs.? If there is a conspiracy, it is well-hidden.? There are simpler ways to understand the mess that comes out of national politics.? We get the result that is least offensive to the most, and pleasing to few.

We had a good discussion, but I am not the one to put myself forward.? I made some comments, but did not get to ask my questions.? My personality was not the dominant one.

What I propose to do in this series of articles is go through the main arguments of the US Treasury from the handouts that they gave us (sorry, I can’t scan them and put them out for view), and try to give a fair rendering of what they have done.? My audience is dual: I am addressing those who read me in the blogosphere, and those at the Treasury.

-=-=-=-=-==–=-==–==-=–=-==-=-=-=-=-=-

Treasury officials said that they were trying to reduce the footprint of the rescues/bailouts as much as possible, doing it at a rate that would not jeopardize the recovery.? Their goal is to put in place? regulations that will prevent future disasters once the current disaster is past.

David: Well, yeah, that’s what to do if you can.? The question is what will happen to the markets when you start to remove significant stimulus from critical areas, as I said to my pal Cody a year ago.? Much of that is not in the domain of the Treasury, but the Fed.

The Treasury understands that the troubles of 2008 came from poor credit regulation and tight coupling in the financial system.

David: we over-encouraged single family housing as a goal for Americans.? When debt was too high for cash flows from average American households to afford residential housing, the prices of housing began to fall, and the foreclosure process began, as foreclosures happen once someone is inverted on their mortgage.? Residential real estate prices overshot by a lot.? We should be surprised that there are problems now?

I would not only eliminate the tax credit for new buyers, but I would phase out the interest deduction for mortgage interest.? Get people financing with equity, not debt, even if it means the economy is sluggish for a few years.? It will bring a longer-lasting self-sustaining recovery.? Debt-based systems are inherently fragile because fixed commitments remove flexibility from the system.

To the Treasury I would say, “Markets are inherently unstable, and that is a good thing.”? They often have to adjust to severe changes in the human condition, and governmental attempts to tame markets may result in calm for a time, and a tsunami thereafter.

Those that understand chaos theory (nonlinear dynamics) were less surprised by the difficult markets that we have faced.? We saw it coming, but could not predict exactly when the system would face crisis.? Bears are often right, but with significant delays.

The government is not the majority player in the system, but is the biggest player.? At critical points their willingness to offer support helped lead to a market rebound.

Now in the actions of the government, there is some “making virtue out of necessity.”? In supporting Fannie & Freddie in February 2009, they did not have much choice, unless they were to let them fail, which might have been a good thing.? As it is, F&F seem to be black holes where the government is unlikely to recoup their investments.

As for the bank stress-testing, one can look at it two ways: 1) the way I looked at it at the time — short on details, many generalities, not trusting the results.? (Remember, I have done many such analyses myself for insurers.) or, 2) something that gave confidence to the markets when they were in an oversold state.? Duh, but I was dumb — the oversold market rallied when it learned that the Treasury had its back.

I’m tired, and that’s enough for the evening.? I’ll pick this up tomorrow.

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