Some really great thoughts on yesterday’s FOMC from Mike O’Rourke of BTIG, who compares the change in language to a statement made in 2003, when the Fed cut rates, and told the market it remained vigilant against more deflation:Just as many of the final rate cuts of an easing cycle during the Greenspan Fed were intended to be, the June 2003 ease was meant as an insurance policy as they waited for “clear evidence” to emerge. More importantly, as Bernanke clearly stated, he believed it was very important to avoid allowing the financial markets to become a headwind. “For these reasons, it’s extremely important that we do what we can to maintain the supportive configuration in financial markets.” No doubt this was simply another iteration of the “Fed Put.”
Now we have our new insurance policy:
The key language change in today’s FOMC statement also honed in on inflation falling below target, “Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.” The Fed was clear to invoke its mandate indicating its inclination to implement policy when they see fit. This is confirmed by the fact that the language from the August statement about keeping the level of securities holdings constant only survived the one meeting and was dropped. As such, today the Fed has unveiled an open ended “Fed Put.” Undoubtedly, the Fed would very much prefer to do less, or preferably nothing, but should the economy or markets falter (remember, supportive markets are important), it has paved its way to respond. Bernanke is usually not a fan of ambiguity in policy, but it likely works to the Fed’s advantage in this case. The market will recognise the greater the weakness the greater the response merited, theoretically making the power of the “Fed Put” reflexive and grow with market expectations.