Interest Rate Roundup

Wednesday, June 24, 2009

Fed keeps rates unchanged, doesn't change debt purchase targets, gives no clarity on "exit strategy"

The Federal Open Market Committee left its interest rate target unchanged at 0% to 0.25%. Also, the Fed left its targets for purchases of Treasury debt, GSE debt, and mortgage backed securities unchanged. The complete statement is as follows:

"Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

"The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

"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 continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

"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."

My take? The Fed essentially punted, striking out the middle ground. Policymakers said the economy is improving, but they gave no hint they would throttle back on monetary stimulus. They threw a bone to the inflationists with a comment about rising commodity prices, but then said those worrywarts should essentially be ignored. They referenced their extraordinary programs to purchase Treasuries, mortgage backed securities and agency debt, but provided no clarity or details about an exit strategy.

I can't help but think of that old Magic 8-Ball response: "Reply hazy, try again." The Fed isn't offering much clarity about what it will do next because it doesn't seem to know.

The market reaction: Long-term bonds are getting whacked, with the bond futures down about 15/32 at last count. The dollar index is at its high of the day, up 70 bps to 80.54. Stocks are giving up early gains, while gold is fading somewhat.


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