Ben Bernanke and the Federal Open Market Committee have decided to keep rates the same. That should have been expected by everyone. What was going to be different here about this FOMC meeting is that this month marks the end of Operation Twist. The new version of quantitative easing is that the Treasury will simply start buying up longer-dated assets. This is the wholesale effort of printing up money to absorb more and more assets off of the market. If you will recall from earlier reports, the Fed governors have been talking about thresholds being set at 6.5% unemployment and 2% inflation. Here is the real threshold limitation list:
The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
Economic purists and gold bugs will assert that this is the beginning of the real efforts to devalue currencies by printing money and buying assets. The Fed has maintained over and over that it can fight inflation. Today's FOMC action was voted 11-to-1 for the move as unemployment remains elevated.
The new view to remain highly accommodative until unemployment is back under 6.5%. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. The Fed will continue buying additional agency-issued mortgage-backed securities to the tune of $40 billion per month and will purchase longer-term Treasuries initially at a pace of $45 billion per month. And on rollover dates, maturities, and the like:
The Committee 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 and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
On a personal note… My interpretation is that the FOMC just tied a zero-rate floor up until the unemployment rate gets back under 6.5% and as long as inflation expectations (not the actual inflation rate on a single report) stays under 2.5%. Even then, the stance would be to a neutral stance rather than a tight credit stance.
Bill Gross of PIMCO just noted on CNBC that his calculation for how long this zero-rate and asset buying may last is going to be alarming to economic purists. He said that based upon 200,000 or so payrolls added per month this new policy would be in place until around 2017.
Another issue in this threshold is that the end of 2014 is not really in this target. Until inflation goes over a sustained 2.5% and/or until the unemployment rate gets under 6.5%, you just got the formal confirmation of QE-Infinity!
Here is the full FOMC statement.
JON C. OGG
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