Redacted Version of the September 2011 FOMC Statement

August 2011September 2011Comments
Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected.Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow.No significant change.
Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated.Hints that they think unemployment may be peaking?  Not sure.
Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.  However, business investment in equipment and software continues to expand.  Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions.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.Switched the order around, but:

  • Household spending view edges up.
  • Supply chain issues in rear view mirror, less significant than the Fed thought.
  • Business investment is strong, excluding commercial real estate.
More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks.Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks.What evidence do they have that overall inflation has moderated?  I don’t see it; this is more grasping at straws.
Longer-term inflation expectations have remained stable.Longer-term inflation expectations have remained stable.No change.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.No change.
The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.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.Shades down their view of the recovery overall.  They have little hope for employment.
Moreover, downside risks to the economic outlook have increased.Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets.Mentions strains in the 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.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.No change
 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.New paragraph announcing Operation Twist.  It won’t work.
 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.Reinvesting the proceeds in agency MBS will help keep down yields for GSE-backed mortgages on housing that is not inverted, which isn’t helping much.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.  The Committee 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 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.

 

No real change.  The Fed only mentions its “mandate” or “dual mandate” to defend unpopular policies.
The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. Sentence dropped, as it is covered above.
The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. Sentence dropped, as it was dealt with above.
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 these tools as appropriate.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.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; Sarah Bloom Raskin; Daniel K. Tarullo; 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; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.Note dissenters below.
Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time.Similar to last time, though difficult to tell the degree to which they disagree over the additional measures announced today.

Comments

  • Announces an operation to twist the yield curve, sending the long bond up almost 3% in price.  Also announces the reinvestment of proceeds from Agency Bonds and MBS into more Agency MBS.
  • In my opinion, I don’t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy is located.
  • Also, the reinvestment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government.
  • Still engages in wishful thinking regarding inflation, thinking that it is declining.  Points at energy and commodities, but that’s not the largest part of what drives inflation.
  • The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.  As a result, the FOMC ain’t moving rates up, absent increases in employment, or a US Dollar crisis.  Labor employment is the key metric.
  • Difficult to tell how much the hawks disagreed with the new “easing tools.”
  • The Fed is out of good policy tools, so it will use bad policy tools instead.

Questions for Dr. Bernanke:

  • Why do you think that holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy is located?
  • Why will reinvestment in Agency MBS help the economy significantly?  Doesn’t that only help solvent borrowers on the low end of housing, who don’t really need the help?
  • Couldn’t increased unemployment be structural, after all, there is a lot more competition from labor in emerging markets?
  • Isn’t stagflation a possibility here?  I mean, no one expected it in the ‘70s either.
  • Could we end up with another debt bubble from keeping short rates so low?
  • If the Fed ever does shrink its balance sheet, what effect will it have on the banks?
  • Is it possible that you don’t really know what would have worked to solve the Great Depression, and you are just committing an entirely new error that will result in a larger problem for us later?
  • How big is the effect on employment from higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan?

3 Comments

  • wsm says:

    “What evidence do they have that overall inflation has moderated?”

    As always, it is the change in broad credit outstanding, marked to market.

    Though I don’t have a link to a reliable source that is sufficiently comprehensive (M1/M2 is non-sensically narrow for this type of analysis), the deflationary pressures are palpable.

  • hawkingvalue says:

    Great summary. Love the blog as well – i check it every night. Very insightful commentary.

    What are you thoughts on the market’s react at close today on insurance stocks following the FOMC statement?

    Clearly the unintended consequence of Operation Twist puts pressure on Life and Annuity writers’ reinvestment rates. That said, across the board many P&C writers with short duration porfolios were also beaten down at close. Given many are trading in the 0.7x to 0.8x P/BV range (in a hardening homeowners market), if someone can stomach the potential volatility in these names the next 3-6 months, they could provide a nice return. Time will tell.

  • Dave_G says:

    I think the risk of doing nothing was higher than the risk of doing something.

    Still, I recommend bracing for impact.