Feds Roll Out Heavy Artillery: Annotated Statement

Tech stocks - and indeed the entire U.S. stock market - is jumping this afternoon on the news that the Federal Reserve has decided to bring out its most powerful weaponry in the face of an increasingly nasty recession.

The Fed set a target on the federal funds rate of zero to 0.25 percent, which would suggest there isn’t any more cutting to do from here.

Here’s my annotated version of the statement today from the Federal Open Market Committee [author comments in italics]:

Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined.

Perceptive, aren’t they?

Financial markets remain quite strained and credit conditions tight.

I just looked at my 401(k) yesterday, and “strained” is not the word I would use.

Overall, the outlook for economic activity has weakened further.

Ya think?

Meanwhile, inflationary pressures have diminished appreciably.

Last night, with my car beeping at me that I was running out of gas, I went to the usually over-priced Shell station to fill up. I spent $16.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

Hard to argue with that…for now. But you do have to wonder if at some point down the road the gazillions of dollars in bailouts and stimulus programs won’t eventually re-heat the inflationary fires.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.

Are they interested in buying some semiconductors?

In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

This not a one-day sale.

The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level.

They having plenty of ink, and will be printing up piles of cash.

As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.

Really, they aren’t that picky.

The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.

Translation: Long-rates have remained stubbornly high, and something needs to be done about it.

Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses.

Why are they waiting?

The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

The Fed is channeling Phil Rizzuto: They’ve become the Money Store.

Comments

[trader58]

It will be a traders market for a long time to come, and it will be a long time before, if ever, investors will be able to sleep at night.

2008 Dec 17 01:38 AM

[Tony O]

oh so now printing up money is a solution to one of the biggest messes of our time? and of course there will be NO long term repurcusions, right?

geez...I'm beginning to think that doing nothing and letting the markets sort this out properly is looking like the saner solution both in the short term and long term.

2008 Dec 17 01:47 AM

[zanardm]

Too much debt is the problem; not the solution. The private sector is deleveraging the house of debt cards; whereas the public sector is leveraging up, with tremendous debt increase. The VIX is fading, supply is enormous; and what about demand in 2009+? In these extreme times, might th treasury market start behaving unusual; such as abrupt profit taking and stamped in order to protect profits?

2008 Dec 17 03:37 AM