FOMC Decision And Statement Analyzed Line By Line

Today at 2:15 the Fed will announce there views on the economy via their statement.  The one thing certain is that they will keep the rate anchored at 0.25%.  In prior statements they have said that the target rate would stay at the current rate for an “extended period.”  I would not think that “extended period” was one month.

Where they might differ is in the other nuances of the statement with a slant toward a slightly more positive statement.    The Fed has to transition the monetary and fiscal policy changes.  We know there is no cash for clunkers anymore.  We know that the housing mortgage allowance is scheduled to lapse at the end of November.  We know the Fed purchase of Treasuries is likely over and that mortgage purchases will continue as a means to continue to support the housing market which is still the main driver for the economic health of the economy.  The support will gradually be phased out, but it is likely too soon given the high unemployment.   The positive is there is likely to be some inventory replenishment.  Employment may continue to stabilize.

Below is the statement from the last meeting.  I have broken up the statement by parts and put my comments in italics/bold.

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Information received since the Federal Open Market Committee met in August suggests that:

Economic activity has picked up following its severe downturn (Still true).

Conditions in financial markets have improved further, and activity in the housing sector has increased (Still true).

Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit  (Still true.  They may add that employment conditions are showing some stabilization and housing in the lower end is picking up, while the higher end continues to be weak due to tighter credit conditions)

Businesses are still cutting back on fixed investment and staffing, though at a slower pace (HMMM.  May soften this wording a bit?);

They continue to make progress in bringing inventory stocks into better alignment with sales.  (Still true. They may speak to inventory replenishment. This added 0.94% to 3rd quarter GDP)

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. (Still true).

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. (Still true).

In these circumstances, the Federal Reserve will continue to employ a wide range of 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 continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  (Still true).

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.  The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  (Still true).

As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. (It ended at the end of October as planned)

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.  The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.(Still true).

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