Redacted Version of the September 2012 FOMC StatementDavid Merkel - Thursday, September 13th, 2012
|August 2012||September 2012||Comments|
|Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year.||Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months.||Unchanged GDP view.|
|Growth in employment has been slow in recent months, and the unemployment rate remains elevated.||Growth in employment has been slow, and the unemployment rate remains elevated.||No real change.|
|Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed.||Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level.||Shades down business investment. Shades up housing.|
|Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.||Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.||No change in their view of inflation. TIPS are showing rising inflation expectations since the last meeting. (5y forward 5y inflation implied from TIPS.)|
|Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.||Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.||No change. Why bother saying this?|
|The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate.||The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.||Monetary policy omnipotent.|
|Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.||Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.||No change.|
|The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.||The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.||Clarifies and tightens its policy objective. CPI is at 1.4% now, yoy, so that is quite a statement.|
|The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.||To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.||Commits to an open-ended purchase of low-coupon agency residential MBS. Wonder how long it will take them to saturate that market?
Also continues the twist program in Treasury bonds.
Will reinvest maturing MBS in more MBS, and agencies in agencies.
Does not mention how the twist will affect those that have to fund long-dated liabilities.
|The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation||The Committee will closely monitor incoming information on economic and financial developments in coming months.||Moved up from below, no real change|
|as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.||If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.||Conditions additional policy changes on the labor market.|
|In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.||The FOMC promises what it cannot know or deliver.|
|To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy.||To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.||Promises that they won’t change until the economy strengthens. Good luck with that.|
|In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.||In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.||Extends low Fed funds out by around five months versus the last FOMC statement.|
|Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.||Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.||No change|
|Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant an exceptionally low level of the federal funds rate.||Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.||No change. Only semi-sane person in the room.|
- The FOMC pulls out all of the stops. When this policy doesn’t work, what will they do?
- The FOMC commits to conditional but potentially unlimited agency residential mortgage-backed securities [MBS] purchases, continues and extends the twist program, and lengthens the period of FOMC Fed funds policy accommodation.
- In my opinion, I don’t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself.
- Also, the investment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
- The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations. As a result, the FOMC ain’t moving rates up, absent increases in employment, or a US Dollar crisis. Labor employment is the key metric.
- GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers. Inflation has moderated, but whether it will stay that way is another question.
A Statement to Dr. Bernanke:
More debt will not get us out of this crisis. The Great Depression ended when enough debts were compromised, paid off, or cancelled, which from my study is 1941, before WW two started.
Your policies further aid the growth of the budget deficit, and encourage malinvestment in housing and banking, two things in a high degree of oversupply. The investments in MBS only help solvent borrowers on the low end of housing, who don’t really need the help. Holding down longer-term rates on the highest-quality debt does not have any impact on lower quality debts, which is where most of the economy finances itself.
The problems with unemployment are structural, not cyclical. Labor force participation rates continue to decline. There is greater labor competition around the world, forcing down wages on the low end. There is nothing that monetary policy can do to change this. You can create stagflation through your policies, but not prosperity.
When inflation does arrive, the FOMC is going to find it very hard to raise Fed Funds or shrink its balance sheet. The banks will not react well as you try to shrink, and the long rates that you have held down will react violently.
You haven’t thought through all of the “second order” effects of your policy. Even the “first order” effects, which favor the rich over the poor, seem to elude you. Assets rise, helping the rich. Interest rates fall, helping the rich who can borrow. Commodity prices rise, harming the poor.
Insanity is doing the same thing over and over, and expecting a different result. When will you realize that the policies of the Fed aren’t helping, and need to be abandoned?
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