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Federal Reserve Goes Small After FOMC Meeting

The Federal Open Market Committee has just released a statement on the outcome of their meeting today, and they do acknowledge the shaky state of economic recovery, saying that the pace will now be “more modest in the near term than had been anticipated.” And they’re going to do something about it! But not a whole lot. From the release:

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, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.

Basically, they are keeping the same amount of holdings on the balance sheet, and they use the language that the federal funds rate will remain “exceptionally low” for an extended period. That falls along the just maybe axis on the range of possibilities. This is a de facto increase in their balance sheet, since the plan was to gradually take away the punch bowl around this time. But the change will be modest at best. The FOMC also didn’t specify what “extended period” for the low federal funds rate means, which could have provided some clarity. And Thomas Hoenig of the KC Fed, the tighest-money advocate on the committee, dissented again.

All of this is happening while even the FOMC admits that “inflation is likely to be subdued for some time.” They’re implicitly saying that they will miss their inflation target. Meanwhile, borrowing on Treasury bills is ridiculously low. The bond markets are practically inviting the government to spend more. The Fed could buy up those T-Bills, and not just to cancel out MBS sales.

But policymakers still have an odd sense of calm, despite the mass unemployment and the prospect of a slow recovery or even a double-dip recession.

UPDATE: More on the reinvestment of MBS into Treasury securities here. The Fed wasn’t reinvesting maturing MBS until now, so this is a decent, though small, change. And the market has reacted well so far.

UPDATE II: Interesting comparison of this statement with the previous one from June.

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David Dayen

David Dayen

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