My FOMC Statement

The Fed’s anointed ones in the media and in the earlier release of the TBAC statement this morning said that the Fed would do $100 billion a month in purchases of longer term Treasuries. Lo and behold the Fed came in light at $75 billion a month, disappointing the market initially. This is more than the amount of $65 billion per month that I had suggested would be needed to keep the market pots boiling. The initial reaction one way or the other notwithstanding, pending other developments in the banking and financial system, I’ll stand by this conclusion. I’ll post more discussion in the Fed Report later this week, and will discuss with Russ Winter in a Radio Free Wall Street podcast to be posted tomorrow.

Adding a few thoughts here from my Twitter feed.

The Fed posted on the NY Fed website that it would maintain its MBS replacement purchases and expects that the combined programs will total $850-900 billion. At the current monthly rate of MBS replacement of $32 billion, that would total $107 billion a month. That’s more than enough to keep stocks bubbling, and to exacerbate the commodities spike. This will crush discretionary spending and shut down the economy. Thus the Fed has sown the seeds of the program’s own destruction and maybe, finally, its own destruction. Remember, these people have proven time and again to be out of touch with reality. They are insane.

Here is the statement:

Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and 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, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.

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