FOMC Statement, Redacted Version

The Federal Open Market Committee decided today to establish akeep its target range for the federal funds rate ofat 0 to 1/4 percent.

Since the Committee’s last meeting, labor market The Committee continues to anticipate that economic conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened furtherare likely to warrant exceptionally low levels of the federal funds rate for some time.

Meanwhile, inflationary pressures have diminished appreciably. Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

In light of the declines in the prices of energy and other commodities in recent months and the weaker prospects for considerable economic activityslack, the Committee expects that inflation to moderate furtherpressures will remain subdued in coming quarters. 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.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The focus of the Committee’s policy going forward will beis to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustainare likely to keep the size of the Federal Reserve’s balance sheet at a high level. As previously announced, over the next few quarters the The Federal Reserve willcontinues to 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 itsthe quantity of such purchases of agency debt and mortgage-backed securitiesthe duration of the purchase program as conditions warrant. The Committee is also evaluating the potential benefits of purchasingis prepared to purchase longer-term Treasury securities. Early next year, the if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will also implementbe implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal ReserveCommittee will continue to consider waysmonitor carefully the size and composition of using itsthe Federal Reserve’s balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. CummingWilliam C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. FisherCharles L. Evans; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Dennis P. Lockhart; Kevin M. Warsh. and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.

Quick Hits

• The ZIRP will continue for a long time, like Greenspan’s ill-considered 1% policy.
• Credit easing will persist. Lacker seems to want the less complex quantitative easing.
• The Fed will purchase longer duration debt than is ordinarily done. I will continue to buy mortgages and agencies.
• They are hoping for recovery to begin in late 2009.
• We will not see a normal Fed balance sheet for a long time.

Comments

[Jake Berzon:]

David, this piece looks like the result of a word processor's "Compare and Merge Documents" function, with the documents, of course, being last December's ( www.federalreserve.gov... ) and today's ( www.federalreserve.gov... ) FOMC statements.

The implication is that you can glean some useful information from analysis of the differences. I would be curious to find out what insight you were able to get from this comparison.

Jan 28 04:58 PM

[User 265729:]

The Federal Open Market Committee? Market?

Maybe the U.S. Goverment is running a shill market.

Look at the markets today. Based on sound fundamentals? Based on any long-range outlook (1-2 years) that things will significantly improve? NO! When you hear this phrase on the news:

"Stocks rallied today [FILL IN THE BLANK WITH ANY ONE OF THE ITEMS BELOW]..."

1. ...after the House approved a bailout plan...

2. ...after a bailout plan was proposed...

3. ...when the government....

4. ...after the Fed said....

5. ...based on the Senate vote...

6 ...on a/an $X billion or $X trillion dollar stimulus...

Let me tell you something, when you have the U.S. Government saying that they'll do "whatever it takes," I assume they mean lie, cheat, steal and even kill to make things look good.

Meanwhile the IMF sharply revised the downbeat of the economy today and the International Labor Organization (ILO) said that 51 MILLION JOBS could be lost in the world THIS YEAR.

But this is all about appearances, not the real world economy.

Jan 28 05:52 PM

[User 265729:]

P.S.: Bloomberg headline today, for example:

"U.S. Stocks Gain, Extend Global Rally on Bank-Bailout Plan"

Jan 28 05:55 PM

[jrs87sch:]

I think we are ready for a short-term trend upwards based on optimism. However, remember that bear market rallies are just that. They tend to turn around sharply and head back down.

We will be in a trading range until something very significant occurs.

If you think Mutual Funds are a good choice right now, I have reviewed the 7 Best Mutual Funds to Buy in 2009 on my site. Check it out if you like.

*I like the recent optimism*

Jan 28 07:16 PM

[Obama is Bu...:]

Bernanke failed to say **how** he plans to buy longer dated debt. The Fed doesn't have any actual money left ... in order to buy any debt (long dated, mortgage or other) the Fed will need to print money.

Monetizing debt has only one outcome...

Jan 28 07:39 PM

[CJJ:]

A bunch of expert comments. I love when people tell me with 100% certainty that something is going to occur, execept they have no time horizon to their claims. I especially love that as things become more and more uncertain people become more certain about the future.
Maybe we need a new definition of instanity:
"Insanity is defined as becoming more certain of future events as the preceding events become more uncertain."
But I'll agree here, the markets will be generally down until they get better. I have no time horizon on that.

Why doesn't any bring up the fact that the Dow and Nikkei have basically tracked eachother for the past 6 months. Or that the Dow, NASDAQ, S&P all have basically been identical. Maybe when this stops and there are some increased individual moves it will be a sign the worst is over.

Jan 28 10:00 PM

[Tradememe:]

Ever since Greenspan's tortuous language, the FOMC statement might as well be a No Comment.

Jan 28 10:01 PM

[SoYouThinkY...:]

The Fed Will Buy All Treasury Bonds in Existence if Necessary . Sound far fetched? It’s not. Bernanke said so himself in 2002.

The Fed absolutely believes that it can keep Treasury bond rates down all across the yield curve. They will do this by enforcing a ceiling on yields across the maturity curve. They believe that they can do this by buying only a small portion of outstanding bonds but if that does not work they are not sunk. In 2002, Bernanke said “At times, in order to enforce these low rates, the Fed [in the years before the Federal Reserve-Treasury Accord of 1951] had actually to purchase the bulk of outstanding 90-day bills.” Therefore, the Fed plans to buy as many bonds as necessary to enforce their policy. If the market does not respond with a small number of purchases, they will just keep on buying until they are the only buyer left. We are talking about the purchase of trillions upon trillions of securities.

So that’s the next step - the enforcement of a ceiling on treasury bond yields and the purchase of unlimited bonds if necessary to accomplish it. You have been warned.

For more please read my extended piece on the subject:
soyouthinkyoucaninvest...

Jan 28 11:28 PM

[Bill Thompson:]

This bad bank plan has a lot of revisions needed before it can be effective. It worries me, see here crashmarketstocks.com

Jan 29 01:44 AM

[cells200:]

Can anyone help me to understand how long-term government bond yields influence interest rates on mortgages, corporate bonds and municipal debt?

Jan 29 01:58 AM