Redacted Version of the December 2012 FOMC Statement

October 2012December 2012Comments
Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to expand at a moderate pace in recent months.Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions.Remember when the FOMC cited the Tsunami in Japan for economic weakness that would soon go away?  More grasping at straws.
Growth in employment has been slow, and the unemployment rate remains elevated.Although the unemployment rate has declined somewhat since the summer, it remains elevated.So long as discouraged workers increase, this is a meaningless statement.
Household spending has advanced a bit more quickly, but growth in business fixed investment has slowed.  The housing sector has shown some further signs of improvement, albeit from a depressed level.Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed.No real change – just word order differences
Inflation recently picked up somewhat, reflecting higher energy prices.  Longer-term inflation expectations have remained stable.Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.Shades down their view of inflation, blaming energy prices. TIPS are showing rising inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is now at 2.97%.  The FOMC is wrong on inflation.
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. Any time they mention the “statutory mandate,” it is to excuse bad policy.
The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.Emphasizes that the FOMC will keep doing the same thing and expect a different result than before. Monetary policy is omnipotent on the asset side, right?
Furthermore, 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 change.
The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.No change. CPI is at 2.2% now, yoy, so that is quite a statement.
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 will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.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 will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.No change.

Does not mention how the twist will affect those that have to fund long-dated liabilities.

Wonder how long it will take them to saturate agency RMBS market?

 

The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it 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.The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. 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 and, in January, will resume rolling over maturing Treasury securities at auction.Operation Twist continues.  Additional absorption of long Treasuries commences.  Fed will make the empty “monetary base” move from $3 to 4 Trillion by the end of 2013.
These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.No real change.
The Committee will closely monitor incoming information on economic and financial developments in coming months.The Committee will closely monitor incoming information on economic and financial developments in coming months.No change. Useless comment.
If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.Explicitly says that they will buy more long Treasuries.
In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.The FOMC promises what it cannot know or deliver.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.No change.

Promises that they won’t change until the economy strengthens.  Good luck with that.

In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.Not a time limit but economic limits from inflation and employment.

Just ran the calculation – TIPS implied forward inflation one year forward for one year – i.e., a rough forecast for 2014, is currently 2.01%.  The FOMC has only 0.49% of margin in their calculation if they are being honest, which I doubt.

Next time, I will provide a graph.

 The Committee views these thresholds as consistent with its earlier date-based guidance.New sentence, and it is not accurate.
 In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.New sentence.  Giving yourself an out clause on the hard-and-fast promises made above?
 When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.New sentence. So what?
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.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.No change
Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and disagreed with the description of the time period over which a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted.Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.Lacker sharpens his hopeless dissent against a flock of doves.  I like that he is opposing the QE, as well as the foolish promises regarding Fed funds.

Unlike the rest, he cares about the institutional reputation of the Fed, and thus opposes asset-side policies.

 

Comments

  • I really think the FOMC lives in a fantasy world.  The economy is not improving materially, and inflation is rising. Note that the CPI is over their 2.2% line in the sand.  TIPS-implied inflation 1X1 (one year ahead for one year) is 2.01%, and 5X5 is 2.97% annualized.  Both of these measures have continued to rise since the last meeting.
  • Current proposed policy is an exercise in wishful thinking.  Monetary policy does not work in reducing unemployment, and I think we should end the charade.
  • 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. When this policy doesn’t work, what will they do?
  • Also, the investment 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.
  • GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.

A Statement to Dr. Bernanke:

More debt will not get us out of this crisis.  The Great Depression ended when enough debts were compromised, paid off, or cancelled, which from my study is 1941, before World War two started.

Your policies further aid the growth of the budget deficit, and encourage malinvestment in housing and banking, two things in a high degree of oversupply.  The investments in MBS only help solvent borrowers on the low end of housing, who don’t really need the help.  Holding down longer-term rates on the highest-quality debt does not have any impact on lower quality debts, which is where most of the economy finances itself.

The problems with unemployment are structural, not cyclical.  Labor force participation rates continue to decline.  There is greater labor competition around the world, forcing down wages on the low end.  There is nothing that monetary policy can do to change this.  You can create stagflation through your policies, but not prosperity.

When inflation does arrive, the FOMC is going to find it very hard to raise Fed Funds or shrink its balance sheet.  The banks will not react well as you try to shrink, and the long rates that you have held down will react violently.

You haven’t thought through all of the “second order” effects of your policy.  Even the “first order” effects, which favor the rich over the poor, seem to elude you.  Assets rise, helping the rich.  Interest rates fall, helping the rich who can borrow.  Commodity prices rise, harming the poor.

Insanity is doing the same thing over and over, and expecting a different result.  When will you realize that the policies of the Fed aren’t helping, and need to be abandoned?

5 Comments

  • Pacioli says:

    I suspect I will have several more comments/questions around this post.

    But could you start by walking through the calculation you link to in computing the 5Y/5Y implied by TIPS?

    Thx in advance.

  • Pacioli says:

    Please disregard the first comment requesting explanation on the computation.

    I was able to recreate the math to understand how you calculated the 5Yx5Y.

    Thx.

  • gkm says:

    Thanks for the redaction. Two points: 1) I did find the new verbiage on inflation awareness revealing – the Fed obvious sees something more pressing here and is stepping up 2) Bernanke at the end of the presser stammered the MBS spread accruing to the banks as something they have studied exhaustively and yet he couldn’t get his wording straight nor was his answer definitive the spread wouldn’t continue to widen. I don’t think he liked that question one bit so kudos to that journalist.

    • Good point on the MBS — give credit to Greg Robb, of MarketWatch. I think BB is frustrated that he can’t get mortgage rates lower, and that’s partly because the competition level in mortgages is lower without all the shadow banks, and with additional regulation.

  • richt says:

    David — Fantastic post. I think all your comments are 100% spot-on.

    What I found interesting about the “thresholds” is this: it’s not if we get to 2.5% core inflation (as many pundits out there are implying)… it’s if the Fed’s 1-2 year forecast gets over 2.5%

    Big difference! Especially with these guys always dismissing inflation as transitory, as you pointed out above. They are usually late to see things, and it’s not hard to imagine that by the time their 2 year forecast gets above 2.5%, it will be far too late. As you imply at the end — they are really trapped.

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