FOMC: Be Mindful of the Future

Alright I’m trying something new here… I’m going to call the actual Fed statement. In about 20 minutes you can make fun of how wrong I was.

Incoming data indicates to the Federal Open Market Committee that the economy continues to contract, though the pace of contraction appears to have further slowed since April. Household spending has shown signs of stabilization, but remains constrained by ongoing job losses and lower housing wealth. Credit conditions for both consumers and businesses have moderated, yet the Committee observes that credit is generally only available to the best borrowers in both markets. There are signs that the business inventory liquidation which occurred toward the end of 2008 and first few months of 2009 has ended, and some rebuilding of inventories may be underway.

Therefore while the Committee acknowledges the progress made thus far, it also judges that economic activity is likely to remain weak for a time. Nonetheless, 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.

In light of continued economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve currently plans to 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. In addition, the Federal Reserve currently expects to buy up to $300 billion of Treasury securities by autumn. 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. In addition, should economic conditions warrant, the Committee may choose to curtail these security purchase programs before the full amount has been purchased.

The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee believes these programs are temporary in nature and at some point in the future will need to be wound down. While it does not judge that the need will arise in the near term, the Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of financial and economic developments.

The key changes:

  • Indicate some improvement in the economic outlook, especially the credit markets, which have improved a good deal since April.
  • Suggest that QE (outside of the TALF) will not be expanded. They won’t come out and say so at this point, but given the improvement in the outlook, some curtailment of QE is appropriate.
  • Acknowledge the need for an exit strategy. Conditions are too fluid to outline such a strategy right now, but its enough for the moment to discuss it conceptually.
  • Finally, expect the FOMC members to start giving some specific ideas about an exit strategy in their upcoming speeches.

All this should calm the bond market, creating a bull flattener, and improve the dollar.

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