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FOMC eases policy as growth is unsatisfactory and downside risks significant

FOMC eases policy as growth is unsatisfactory and downside risks significant

22.9.2011 9:44

 - Fed is unhappy with economic growth and high unemployment.... 
 - And sees significant downside risk.... 
 - Therefore, it starts an operation twist and.... 
 - Will reinvest maturing agency and agency-MBS in agency MBS paper

The FOMC eased its policy by using two (new) tools. It starts a $400B operation twist aimed at extending the maturity of its portfolio and thus pushing long term Treasury yields lower. To help the mortgage market, it will now reinvest principal payments of maturing agency and agency MBS paper in agency MBS paper (before it reinvested in Treasury paper). This should push the risk premia in the mortgage market lower. It also reconfirmed that it believes Fed funds rates may (conditionally) remain at very low levels at least through mid-2013 and it maintains its policy of rolling over maturing Treasury securities.

The FOMC signalled it still has a range of tools available to promote a stronger recovery and is prepared to employ its tools as appropriate. It left the door open for more, which might ease the eventual disappointment of markets.

Three governors dissented again, which points to divisions inside the FOMC.

Sober on the recovery...
The FOMC, “continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually towards levels consistent with its dual mandate. It sees significant (new word) downside risks to the eco outlook. The FOMC adds “including strains in global financial markets”. The Fed also dropped the reference to temporary factors inhibiting growth. So, all in all, the FOMC looks more concerned about the recovery than in August.

The FOMC statement on the current state of the economy didn’t show much material changes compared to the August statement, with the exception of dropping “the temporary factors inhibiting growth”. Information received since that meeting indicates that “economic growth remains slow” and point to “continuing weakness in overall labour market conditions.” So, the overall situation was more or less the same as in August, but the deterioration the Fed alluded to in August had disappeared. Household spending was described as slightly better “increasing at only a modest pace”, but this was disappointing as the statement added “despite some recovery in sales of motor vehicles as supply-chain disruptions eased.”

Please download full version of the report from Economy / Analyses section.

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