(RTTNews) - Minutes from the December 16 meeting of the FOMC highlight not only the extraordinary conditions in the economy and the financial markets, note the economists at Global Insight - but also the wide range of extraordinary measures that the Fed has brought to the table to combat the recent sharp deterioration in recessionary conditions.

The FOMC voted unanimously to slash the federal funds target to a range of 0 to 0.25 percent, reflecting the desire to keep very high levels of excess liquidity in the banking system. In addition, the Fed adopted a new communications strategy where future policy intentions would be made more explicit - on December 16 the FOMC communicated that short-term rates would be held down at exceptionally low levels for some period of time.

This succeeded in lowering term Treasury note yields considerably in the second half of December, and the Fed is likely to use this communication tool again in early 2009 to keep long-term treasury yields pinned down at exceptionally low levels.

The FOMC had extensive discussion of its various balance sheet programs, highlighting areas of success and pressure points. The Fed was successful in providing large quantities of liquidity to the banking system through the TAF auctions, and the Fed’s commercial paper facility led to some improvement in these markets, but repo market conditions deteriorated and credit outstanding under the asset backed money market commercial paper facility fell by more than half. In addition, the money market funding facility showed little activity.

The Fed is attempting to spin quite a number of plates under difficult market conditions, and the plate-spinning challenge will become even more daunting in the first half of 2009 as the Fed is launching its programs to purchase $100 billion of GSE debt, and $500 billion of mortgage backed securities. In addition, the FOMC is considering the possible use of quantitative targets for bank reserves or the monetary base.

The bottom line here is that the Fed has throttled up monetary easing to maximum levels. The Fed has risen quickly to the challenge posed by the most severe economic contraction in decades, with obvious downside risks to both growth and prices.

Monetary conditions are close to the point of near maximum stimulus — now it is a matter of lighting the right sparks to get the economy moving again. In this vein, further recapitalization of the financial system via the deployment of the second $350 billion tranche of TARP funds - combined with a large fiscal stimulus in early 2009 - are necessary conditions for the economy to move to recovery. The big question is - will they be sufficient to get the economy moving again by the second half of 2009?

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Posted in Categories: Economy, Releases, USA.

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