FOMC: NO CHANGE IN RATES, QE TO CONTINUE
No big surprises here. QE will continue at the expected rate and the Fed will remain accommodative. The markets are taking the Fed’s comments in the same manner that they have since QE began: buy risk, sell safety.
Release Date: January 26, 2011
For immediate release
Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, while investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.
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 continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. 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; Elizabeth A. Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
Bernanke’s war on America!
See Coolidge Low’s comment and our previous discussion. This is what I mean, and why I have a problem with using the term “Bernanke Put” in the context of QE2. QE2 is not Bernanke’s war on America – he literally can do nothing to automatically and directly cause the markets rise. This is stupid investing assaulting America, and a helpless Fed spinning its wheels because the fed govt isn’t doing enough.
The Fed is doing NOTHING to support the markets, artificially or otherwise. This release does not say “we will make sure equities don’t collapse.” In fact, if anything it says the opposite – “what we tried already didn’t work,” “the economy does not look that great,” and “the market will very slowly recover anyway, thanks to the meager and inefficiently allocated stimulus offered by the govt.”
It’s purely investors’ choice to load up on risk – no one is forcing them to do so. If they want to drastically misinterpret a desperate attempt by the Fed to stimulate the economy in the absence of effective fiscal policy, that is THEIR choosing and THEIR stupidity. It is their choice to pretend like QE2 matters, when the Fed isn’t even saying it will and when basic macroeconomics says it won’t.
Criticisms like “the Fed won’t allow the market to fall” make zero sense. It places blame on the Fed for something they have no role in. The market can fall whenever investors want it too. QE2 isn’t even lowering interest rates!
By the logic of the “Bernanke Put,” anything ever that the Fed does should cause a bubble, because the markets are so stupid that they blindly trust anything that the Fed does will drastically improve the economy.
That’s just hard for me to accept or swallow. In my mind, usage of the term “Bernanke Put” is empty, politically charged rhetoric. It distracts people from the real problem – poor fiscal policy and idiotic investors. You even write in your last post you aren’t even sure the “Bernanke Put” is the reason for the rise in equities.
I appreciate the impact of psychology on finance, but I just don’t see a reason for that to be a factor here when there is ZERO uncertainty that QE2 doesn’t change fundamentals. Or maybe your blog just made me too damn informed about monetary policy and large institutional investors and hedge funds are that stupid. That’s just so hard to believe.
And sorry – I don’t mean to imply you generally spout or feed others’ politically charged, empty rhetoric. Quite the opposite. I enjoy this blog so much for the very reason that it is apolitical, very informed, insightful, and sophisticated. These are just my thoughts based upon my new-found understanding of the economy, for which I owe everything to your efforts in writing this phenomenal blog.
I think you vastly underestimate the Fed’s ability to impact the market via rhetoric…..
I am not saying what the Fed says never matters. It has often. But show me the rhetoric in this specific instance. This is not conventional expansionary monetary policy in the absence of a liquidity trap, when the Fed actually has the ability to achieve what their rhetoric implies.
A tightening liquidity environment is beginning globally and the Fed may be the last to respond. http://www.marketletters.com are watching this closely.
Bernanke isn’t going to stop with QE2. Don’t for a second tell me 5 months from now you think he’ll believe (or want us to believe) the recovery is solid enough to stop. This idea that QE hasn’t worked is absurd. While he openly states multiple objectives with it, it seems quite clear that a higher stock market supersedes all others and that rising equities will take care of all else.. He has bragged about QE1 and now QE2 creating market rallies. Therefore, in the context of his true goal, it has been wildly successful. This is why the plug will never be pulled on QE and will continue well beyond June and also why I fail to see why equities can ever materially and sustainably ( more than 1-2 days) decline in value again, so long as QE is in place.