The eagerly awaited Fed announcement is out.
As the economy has been weakening, everyone was wondering whether Bernanke & Co. would juice the economy with more stimulus.
Well we didn’t get another round of quantitative easing, what we got instead is what people have referred to as “Operation Twist.”
As a way of reducing yields further, the Fed is selling bonds at the short-end of its portfolio, and buying bonds at the long end of the portfolio.
Specifically, it’s doing a $400 billion swap.
Markets are drifting a bit lower right now.
You can see the immediate impact (the twisting, if you will) on the yield curve. Check out the green line (today’s curve) vs. the orange line (yesterday).
Rates are higher at the short end, and lower at the long end, which is exactly what you’d surmise would happen.
That being said, equiteis are lower, now to the tune of about 220 on the Dow.
Some are suggesting that they didn’t quite TWIST as much as they could have. Citi, for example, had thought they’d go to $500 billion.
There were three dissents: Fisher, Kocherlakota, and Plosser.
The full announcement is here.
Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labour market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 per cent 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 mid-2013.
The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time.
Original post: The Fed is running late, but it’s coming very soon.
At around 2:15 the Fed will announce whether or not it will ease more in the face of a weakening “recovery”.
We’ve written a full preview here.
Remember, the basic gist is that investors expect some version of “Operation Twist”, whereby the Fed will do more easing, not by expanding its balance sheet, but by selling the short-end of the curve, and buying more longer-duration bonds.
Most markets are modestly lower going into the news.
Long-term yields, remember, are near a record low.
Keep refreshing the page for more developments.
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