Well, so much for Ben Bernanke and the brain trust at the Federal Reserve not wanting to appear overly concerned about the flagging economic recovery in the U.S. and not wanting to set expectations too high for QE II (i.e., trillions more in money printing).
A short time ago the central bank’s policy making committed released a statement indicating that, to the surprise of no one, short-term interest rates will remain at their freakishly low level of zero “for an extended period”.
As shown to the right, it will be just months before Bernanke outdoes his predecessor, former Fed Chief Alan Greenspan, in keeping rates lowest the longest.
But, the big news was a major downgrading of the economy’s performance and a new policy aimed at keeping the Fed’s $2.3+ trillion balance sheet from shrinking.
On the economy, in place of June’s comment that “the economic recovery is proceeding and the labor market is improving gradually”, the August statement notes “the pace of recovery in output and employment has slowed in recent months”. More importantly, a new paragraph has been added in which the natural decline in mortgage debt due to paydowns will be offset by using those proceeds to buy long-term Treasuries.
The last two policy statements are shown side-by-side below.
It’s fair to say that the Fed did what the markets wanted, however, rolling over an expected $200+ billion in mortgage debt into new Treasury debt was a surprise, this action perhaps being a nod to St. Louis Fed Chief James Bullard’s recent paper in which he argued that the purchase of Treasuries was the best way to proceed in what is now officially QE II.
As noted at the bottom of the statement, Kansas City Federal Reserve President Thomas Hoenig is now a double-dissenter, objecting to both the low rate guarantee and the promise to keep the Fed’s balance sheet steady.
Nice write-up Tim and thanks for the side-by-side comparison. I think this could backfire. There are more than a few bulls around the world who are now saying, “Oh my God, it’s worse than I thought. The Fed is getting ready to crank up the printing press again”.
I think it’s backfiring already……..
They just had to adjust the HFT algos for the Treasury purchases. Lift-off should begin momentarily.
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