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The Federal Reserve monetary policy announcement is out.Rather than go on with full on QE3 (more bond buying), the Federal Reserve is extending what’s known as “Operation Twist” which means that the Fed will buy long dated Treasuries and finance that with sales of short-dated government bonds.
The idea is to pump more liquidity into the system and hold rates low without expanding the Fed balance sheet.
It’s essentially a half-measure, which acknowledges that the economy isn’t so hot, but which doesn’t go all the way into pumping.
The Dow is off 70 on the news. The Dollar is higher.
Bloomberg has spit out the key headlines.
- Fed prepared to take further action as warranted.
- Fed says inflation has decline.
- Fed says employment growth has slowed.
- Fed to buy Treasuries due in 6 to 30 years at current pace.
So the market is down a bit, but Bernanke is having his press conference at 2:15, and he may use that as an opportunity to sound more dovish and hit at more QE coming at a future meeting.
The first analyst reaction actually comes from Morgan Stanley, on Twitter. Morgan Stanley had predicted QE3 and thought more was warranted.
Here’s the full Fed announcement
For immediate release
Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today 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 late 2014.
The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. 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. The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labour market conditions in a context of price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed continuation of the maturity extension program.
More to come..
The moment global markets have been waiting for is finally here: At 12:30, the Federal Reserve will announce its latest monetary policy decision.
In recent months, the crisis in Europe has worsened, and it appears that the US recovery has lost a lot of steam, and so the big question is whether the Fed will use its firepower to once again goose the economy.
Will the Fed announce a third round of Quantitative Easing (injecting liquidity into the market by buying long-dated Treasuries or mortgage-backed securities) or will it extend its current program known as Operation Twist, which involves keeping the size of the Fed balance sheet the same by buying long-dated assets financed by the sale of short-dated assets.
If the Fed chooses neither of the two options, it could still technically ease conditions by changing the language. For example, the Fed currently is indicating that its zero interest rate policy (ZIRP) will last through 2014, but it could say that it now sees zero interest rates going to 2015 or beyond.
Or Bernanke might do nothing, but perhaps hint that conditions have gotten worse to the point whereby any worsening at all will prompt QE3 at the next meeting.
Wall Street analysts are all over the map, with some expressing confidence at QE3, and others expecting nothing.
Following the policy announcement at 12:30, the Fed will then deliver a new economic forecast at 2:00 PM, followed by a Bernanke press conference thereafter.
We’ll be covering it LIVE.
At the moment, markets are all modestly lower (The Dow is off 30 points), gold is down over 1%, and yields are just a hair higher. Basically everything is in a holding pattern.