Fed again was going to go deep into the ‘war-chest’

Interesting article today on the FOMC from TD Economics, the Fed again reaffirmed it’s decision to keep rates at unprecedented low levels to keep the economy in motion. President Lacker also hinted that the Fed again was going to go deep into the ‘war-chest’ and try to remove toxic mortgage stocks from the slumping US bank balance sheets.

 

 

Here is the main TD Economics Article

 

 

 U.S.: FOMC CLOSE BUT NO CIGAR FOR TREASURY BUYING

 

• The FOMC kept the fed funds rate steady and

reaffirmed its commitment to keeping rate exceptionally

low.

• President Lacker dissented, preferring the Fed

to start purchasing Treasuries immediately.

• Fed hints at its willingness to expand balance

sheet further.

• Concerns were expressed about the downside

risks to inflation and growth.

 

Not surprisingly, the FOMC kept the fed funds rates steady and reaffirmed its commitment to keeping rate exceptionally low for some time. The Committee seemed to have advanced the discussions on the purchasing of Treasuries, and although it didn’t quite commit to this today,

it appears that it is only a matter of time before it does so. To this decision, Richmond Fed President Lacker dissented, favoring instead that the Fed immediately embark on expanding the monetary base by buying Treasuries. The economic assessment of the Committee remained grim, with the Fed noting that “industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending”. However, the Fed stated that it anticipates “a gradual recovery in economic activity will begin later this year”, though it considered the risks to the economic outlook to be to the downside.

 

On the inflation front, the Fed noted that it expects inflation to remain subdued on account of the growing economic slack. And the statement goes on to express the Committee’s concerns about the risks that inflation could remain below the levels deemed to be appropriate to foster economic growth, which suggests that the Fed will stand on guard against any deflationary spiral.

 As expected, the Committee did give a nod to the improvements in financial market conditions since the last meeting. However, it did note that “credit conditions for households and firms remain extremely tight.”

 

In the final analysis, with the fed funds rate effectively at zero and its efficacy in stimulating the U.S. economy impaired by the dislocations in the U.S. financial sector, it is now clear that the Fed is willing to pursue more unconventional approaches to monetary policy implementation. In contrast to the prior statement in which the Fed noted its willing to sustain the size of the balance sheet at a high level, the Fed has now expressed its willingness to outright expand it. And in addition to its commitment to expand credit facilities and purchase large quantities of agency

and MBS debts, the Fed is now willing to embark on purchasing longer-dated Treasuries if certain conditions are met – which we believe will occur in due course