FOMC Statement: What It Really Says

Here's my redacted version of the FOMC statement:

The Federal Open Market Committee decided today to lowerkeep its target for the federal funds rate 50 basis points to 1at 2 percent.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the declinesearlier increases in the prices of energy and some other commodities and the weaker prospects for economic activity, the. The Committee expects inflation to moderate in coming quarters to levels consistent with price stability.later this year and next year, but the inflation outlook remains highly uncertain.

Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain.The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman;Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Ms. Cumming voted as the alternate for Timothy F. Geithner.

The Upshot:

• They have finally concluded that the real economy is in trouble, and not just the financial economy.
• They think inflation will move to stable levels (and perhaps they fear deflation — they have moved from a position of rhetorical uncertainty to certainty).  They no longer fear inflation.
• They hope that all they have done so far will work.

My interpretations all, but this statement changed a lot from the last one.

Comments

[winslow:]

The Fed has always been 6 months-1yr behind the true curve. It seems that that more education and thd higher the position, the worse the decision-making ability.

2008 Oct 29 03:51 PM

[who:]

short term solution long term pain

2008 Oct 29 04:10 PM

[who:]

the real global economy is in trouble for all to see - bankrupt countries, companies closing, slowing business activities, higher unemployment, uncertainty - leading to slower consumption

inflation in the long run - printing presses running 24X7!

encourage high savings is way forward

2008 Oct 29 04:14 PM

[herbert hoover:]

yeah but the Dow is at 9000!!!!!!!!!!!

at least for another day or so.

2008 Oct 29 04:18 PM

[Consider_this:]

This is exactly like trying to drive a huge vehicle, with high latency gears/wheels where the wheels are stuck on conveyor belts running backwards.

If the conveyor belt wins, we go backward towards deflation.

If the wheel wins but with too much momentum, we fly forward towards hyperinflation.

If the wheel just barely balances out the conveyor, we'll get equilibrium or slow growth.

And Fed only controls the Accelerator with a huge time lag, with only a REAR VIEW mirror to see it's way, plus we're entering unknown territory as far as the slope of the ground going forward is concerned.

Good luck trading in this environment. Trader guys are nuts!

2008 Oct 29 05:34 PM

[Reinko:]

For me the rate cut says a thousand things but I want to bring up only one detail from these thousand things:

Remember Alan Greenspan with his 'conundrum thing'?

Alan raised his short term rates but miracle miracle the long term rates in commercial spaces stayed below the utter magic from Greenspan.

Greenspan considered this 'strange' but instead of showing 'who is boss' and pump the boss stuff up to 7 or even 8%, it was only very short we did see rates at 5.25%.

It is clear and it is obvious:

At the conumdrum news already the FED had lost it from the chaos that could emerge from the free markets (the jungle so to say).

All economical data since then point to the fact that my original 'you have lost it' conumdrum insight were in fact correct.

Let me spare you the other 999 details...

2008 Oct 29 06:11 PM

[whidbey:]

The statement was not intended to inform anyone, but as a mantra to be uttered by the several and assorted Fed persons daily, you can mouth it too. It designed to assure you that this all makes sense.

The truth is they hope to hell it works cause the gun is empty,

and everyone knows it!

This was desperation in spades, and they dislike having to say that we are on our own. Yes, naked in the wilderness without even a spear!

2008 Oct 29 06:15 PM

[gabe borens...:]

Any sophisticated investor and certainly economists comprehend that the modern economy can not exist without functional financial sector.
Certainly the FED an other Central Banks comprehend this.
That is why such an aggressive steps had been taken in order to stabilize financial sector.
Wnen the 700 billion dollars pacakage is fully implements(5 trillion dollars of fiscal stimulus) combined with the other measures ,the economy will be the recipient of the economic jet fuel.
Allowing for the monetary and the fiscal lag,U.S economy is poised for a record mega rally .
By the second quarter of 2009 ,the GDP will be growing at 5%
In fact there are rumors that the Webster dictionary has found a synonym for that rally -Gabe.
Clearly volatility will continue and on any given day the downside risks exist but make no mistake about this(as one U.S President had reflected) ,the Dow is heading for the 20,000 level.
The only thing you have to fear ,is the fear itself.

2008 Oct 29 07:16 PM

[Reinko:]

A funny quote from Gabe Borenstein:

Allowing for the monetary and the fiscal lag,U.S economy is poised for a record mega rally .

Unquote.

The whole problem with this mega rally it is only more debt that fuels it.

So lets wait and see if more debt will indeed induce a 'mega rally' because in fact mega more debt is used.

Any idiot who thinks there will be a mega rally is in fact a mega idiot...

2008 Oct 29 07:47 PM

[prudentinve...:]

When the fed invents a process whereby they can print grain, oil, steel, copper, electricity, etc, then they will be able to fix the economy. Printing mere paper cannot fix it, as there is already a surfeit of paper currency.

2008 Oct 29 08:47 PM

[zhandax:]

Statistically we are off the chart in terms of the probability of being in this position. Never in history has every country on the planet employed a fiat monetary system with every one of them running their printing presses as fast as they can unload trucks. As mentioned yesterday in another post, we are in the fat tail of the probability distribution which is analogous to being in a wormhole; you don't know what life will look like on the other side. Gabe may get his Dow rally to 20,000 but if he does, I believe he will find that gold made it there first.

2008 Oct 29 09:05 PM

[sickofthehype:]

Just watch, the mega rally will be real, but the bad news is that it will be inflationary based.

Stocks, real estate, commodities, will all skyrocket

2008 Oct 29 09:16 PM

[Dame Daxx:]

Timothy Geithner is in the running to be Obama's Treasury Sec.

2008 Oct 29 10:03 PM

[cluesaw:]

SCENES FROM THE ER, ACT 2008

NURSE: But Dr Ben, you do realize you're prescribing the same medicine that made the patient violently ill?

DR BEN: Relax nurse. I've made up my mind so don't confuse me with facts. Inject the patient with 1/2 point of the elixir, pronto!

2008 Oct 29 10:38 PM

[Moon Kil Woong:]

When the next slew of economic reports starting the end of this week the market is liable to get badly shaken. I advise letting the banks with $25 billion take the bath for the market going back down to 8,000 or below.

2008 Oct 29 11:22 PM

[SugarDaddy:]

Discussions like these are good for overall mental health. However they are in vain and moot because the party and music are about over and their are no chairs....

So Sad !!!

2008 Oct 30 01:41 AM

[Steven Hansen:]

if there is a mega-rally, we will have mega-inflation. 5% growth means money is moving rapidly.

commodiites would be going through the roof, oil to $300. AND WHAMMO. the $hit hits the fan and the dow falls to 6,000. we start again.

gabe, you are screwing with us .... right?

2008 Oct 30 05:52 AM

[1worldcurrency:]

"Stocks, real estate, commodities, will all skyrocket"

And wages? Got to pay the peacekeepers.

Gabe, the last of the true believers.

2008 Oct 30 06:48 AM

[Apple at 60$:]

you all idiots!

2008 Oct 30 09:09 AM

[Smarty_Pants:]

New FED product just issued!!

www.baronbob.com/dolla...

Check it out.

2008 Oct 30 03:14 PM

[TinyTim:]

Gabe-

Wnen the 700 billion dollars pacakage is fully implements(5 trillion dollars of fiscal stimulus) combined with the other measures ,the economy will be the recipient of the economic jet fuel.

Try napalm. Once the $700B turns into $5T, the only hard part is figuring out what bubble it will have caused in advance.
The thing I'm afraid of is a record mega rally of inflation due to all the excess money flowing.

2008 Oct 30 05:40 PM