Redacted Version of the June 2012 FOMC Statement

April 2012June 2012Comments
Information received since the Federal Open Market Committee met in March suggests that the economy has been expanding moderately.Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year.“This year” makes it more of a historical statement, and shades the GDP view down.
Labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated.However, growth in employment has slowed in recent months, and the unemployment rate remains elevated.Shades labor employment down.  Still thinks there is growth in employment rate.
Household spending and business fixed investment have continued to advance. Despite some signs of improvement, the housing sector remains depressed.

 

Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed.Shades down household spending.
Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term inflation expectations have remained stable.Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.Shades down  their view of inflation. TIPS are showing virtually unchanged inflation expectations since the last meeting. (5y forward 5y inflation implied from TIPS.)
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 expects economic growth to remain moderate over coming quarters and then to pick up gradually. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that it judges to be consistent with its dual mandate.The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate.Shades down its views of future GDP growth.
Strains in global financial markets continue to pose significant downside risks to the economic outlook.Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.No real change.
The increase in oil and gasoline prices earlier this year is expected to affect inflation only temporarily, and the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.Declares victory in their view on energy prices.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy.To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy.No change.
In particular, the Committee decided today 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 late 2014.In particular, the Committee decided today 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 late 2014.No change.
The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September.The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative.Extends Operation Twist for six months.  Doesn’t say how much.
The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.I guess the renewal of Operation Twist changes the language here.
The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. 
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.Adds in the two new doves; can’t have enough groupthink.
Voting against the action was Jeffrey M. Lacker, who does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014.Voting against the action was Jeffrey M. Lacker, who opposed continuation of the maturity extension program.Does this mean Lacker is on board with policy accommodation through 2014?  Don’t think so, but maybe a reporter should ask.

 

Comments

  • Operation Twist is extended for six months, but there is no amount set for it.  Looks like an oversight, then again, they may not have a lot of bonds three years and shorter to sell.
  • The changes are significant, because in the space of one meeting, they went from things are good to things are bad.  They shaded down their views on GDP growth, employment, inflation, and household spending.
  • 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 finances itself.
  • 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, even with the recently announced refinancing changes.
  • 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.
  • Do they want the yield on 30 year TIPS to go negative?  Looks that way.
  • GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.  Inflation has moderated, but whether it will stay that way is another question.

Questions for Dr. Bernanke:

  • 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?
  • Why do think extending the period of accommodation by a little more than two years will have any significant effect on the economy, aside from stock and bond prices?
  • Discouraged workers are a large factor in the falling unemployment rate. Why do you think the economy is doing well?
  • Couldn’t increased unemployment be structural, after all, there is a lot more competition from labor in emerging markets?
  • 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 finances itself?
  • 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?
  • 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?

6 Comments

  • Aristarchus says:

    David,
    Thanks for your quick breakdown – however, I don’t see where the TWIST statement says it will buy MBS. From the text you copied it seems to only be Treasuries. I must be missing something. Thanks.

    • MBS is not part of the Twist, they’re just reinvesting maturing principal — it’s mentioned in the next section after the Twist. Twist is Treasuries only, as you point out.

  • Woj says:

    Thanks for the breakdown. To answer your question about the size, Sober Look recently offered this note:
    “BofA is projecting that by the time of the FOMC meeting this month, the Fed will have $175bn of short-term treasuries on its balance sheet.”
    This suggests a monthly run-rate below that of the current operations and is smaller than other numbers I’ve seen thrown about today.

    • Thanks, you & SL saved me a trip to the Fed Z.1 website. Confirmed my suspicions since the last time I wrote on the Fed’s Balance sheet; short end was hollowed out. Will definitely do an update later this year, should I live do long.

      • Woj says:

        Hopefully you will be around to provide that update and all the other great information on your blog.

        One question/comment I might add to your analysis is:
        Does the extension of Operation Twist imply no further QE until after the election?
        My view is yes (http://bit.ly/N9GLe9)

      • lvl says:

        FOMC has a nice interactive website which showed ~7-9b per week activity in maturity extension. So at current stock of 175-200b That’s about 6 months more left.

        A’s to Your Q’s
        1. Not to conflate Physical science with Social but that reminds me of people saying “Theory of relativity/evolution is just a “theory” – it’s possible it’s completely wrong”… a) Possible but his careful, scientific work (or Schwartz/Friedman, et al) and their actions to arrest the free fall in 2008 suggests he knows. b) A “larger problem later” is fairly vague – there’s a terrible problem of unemployment and under-investment now.
        2. Pass… There’s a huge discussion in the econ blogosphere on expectations and how the Fed should be more aggressive.
        3. Don’t see where he said economy is doing well, obviously he was concerned with high unemployment/Beveridge curve discussions
        4. Increased unemployment is not majority – structural. FedSF has an overview and paper in http://www.frbsf.org/publications/economics/papers/2011/wp11-17bk.pdf. Somewhere between .8%-1.5% points in unemployment maybe structural (sector shocks particularly fin. and construction, and about 60-40 split between cyclical and structural in long term unemployed) Competition did not cause us to shed jobs in every sector almost evenly over a couple years.
        5. He addressed this question in the press conference – conceding that mortgage rates, the traditional transmission mechanism were pretty low already, but their actions also pushes down corporates and allows companies to refinance cheaper (http://www.mlindex.ml.com/GISPublic/bin/ITreeFP.asp?Appcode=-1), glancing at my bloomberg – 10yr BBB+ yields (C00810Y Index) went from 5.57% at EOY 09 to 3.16% now.
        6. b) Maybe. a) They don’t “need” help but now the game isn’t to make them solvent it’s to give them excess cash so they spend more – [If I close my next refi next month and save another couple hundred a month I’ll stimulate the economy by breaking down and buying a TV, haven’t had one in 7 years… but I want to see Olympics on a big screen plasma]. Seriously, though, somebody has to eat the $700b in negative equity in US housing and the Fed can’t help there that much.
        7. a)See 1. Maybe possible but there are worse things like persistently high unemployment – 70’s were better. b)This argument was made somewhere else – No unions to demand wage increases so no wage-price spiral. c) There’s no high/persistent underlying inflation anyway (and yes I do buy milk and eggs every week, I just don’t buy gold or some M2 etf) d) Inflation expectations don’t show expected inflation around the corner – and 2yr Breakevens collapsed this year. c) If it becomes a problem outweighing others, the Fed knows what to do, everyone remembers Volcker.
        8. Don’t see how you can both worry about debt bubble and Q.5 (dearth of lower quality debt). And speaking of Z.1, I wish I could attach my chart exercise, but you will have to make your own: plot the cumulative USD debt outstanding by sector ex-Financial, divided by GDP, and while 2000’s saw a debt buble, that growth was practically nil since Q1-09. Federal debt grew, but the rest contracted or stagnated, and Financial credit (I plotted separately) collapsed. Here’s the data download, just add GDP:
        http://www.federalreserve.gov/datadownload/Download.aspx?rel=Z1&series=4ae60d75ab9a4da4e0cf4a6dea9ebb6f&filetype=csv&label=include&layout=seriesrow&lastObs=50

        9. If it shrinks it’s balance sheet in response to a healthy, growing economy, where banks will be earning much better ROC than the effect will be salutary.