The Federal Reserve has previously promised to use all available tools to help the U.S. economy recover and they have followed through with that promise. The U.S. central bank has officially cranked up the printing presses and will be flooding the financial markets with money. No one expected Bernanke to jump the gun and start buying U.S. Treasuries, but that is exactly what he announced today. In addition to expanding their purchases of mortgage backed securities and agency debt significantly, the Fed will buy up to $300 billion in longer term Treasuries. This action puts them one step ahead of the market, which is exactly where they need to be if they want to gain control of market expectations. Their decision to print money and buy U.S. Treasuries has driven the U.S. dollar lower across the board. We have previously mentioned that such a decision would be bearish for the U.S. dollar and bond yields but bullish for equities. Interest rates were left unchanged at 0 to 0.25 percent.
The central bank did not need to start buying Treasuries immediately because mortgage rates have fallen and equity prices have risen, but their decision to do so reflects Bernanke’s hand in the overall decision. In his infamous 2002 speech, Bernanke suggested that the U.S. government could drop money from helicopters to fight deflation. The central bank head finally realizes that delaying the inevitable is not going to pay off and could instead lead to more uncertainty in the financial markets. The reward of announcing purchases of longer term U.S. Treasuries outweighed the risks of not doing so. The Fed’s proactive actions today will help restore confidence in the U.S. government. There is still a lot of hope that the TALF program will work and it is far too early to jump to any conclusions as the program’s roll-out has just begun. Despite the recent improvements in economic data, the Federal remains very pessimistic which contrasts sharply with Bernanke’s rosier outlook on 60 minutes. There is no question that the U.S. economy is still very weak with more than 5 million Americans claiming unemployment benefits.
We expect President Obama and Treasury Secretary Tim Geithner to reinforce the U.S. government’s aggressive efforts to turn around the economy. Obama will be pitching his economic stimulus package on the Tonight Show with Jay Leno tomorrow evening. We expect encouraging words from the President. Treasury Secretary Tim Geithner could also release the details of the Obama’s Administration’s public-private plan to take toxic assets off bank balance sheets as early as Thursday. The questions that remain unanswered include how the assets will be valued, how the losses will be shared between the private sector and tax payers and where the public sector money will come from.
In the meantime, this nuclear decision should lead to more dollar weakness.
Comparing the FOMC Statements:
FOMC Statement March 18, 2009
Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
FOMC Statement January 28, 2009
The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.
In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.