Wednesday, November 3, 2010

FOMC Statement, 11/03/10

Today's FOMC statement was much as expected. Here, the committee says why it wants to do what it is going to do:
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.
Note that, in spite of the fact that Bernanke and others on the FOMC have been quite explicit about the 2% inflation target, they do not put that in the statement. They also do not say what the unemployment rate is that they view as being consistent with "maximum employment."

Here is the key change in what they intend to do:
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 expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. 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.
Thus, the FOMC is retaining the change in policy from the August 10 statement, which would have simply replaced mortgage-backed securities and agency securities that run off with long Treasuries. In addition to that, the Fed is committing (as long as nothing unexpected happens) to the purchase of long-term Treasuries, at the rate of about $75 billion per month, until the second quarter of 2011. This represents an increase over an 8-month period in the stock of outside money of about 45% at an annual rate. Given the experimental nature of this action, it is of course sensible that this is a contingent plan that can be revised in light of new information. I'm as curious as anyone to see what happens.


  1. Wondering if this is going to be sterilized. Much of the Fed's previous asset purchase plans were compensated by the federal government withdrawing money in a complementary fashion and depositing it at the Fed.

  2. JP, excess reserve now are close to $1 Trillion. Since the fall of 2008 the asset purchases have not been sterilized.

  3. Anon - There was the Treasury's supplementary financing program which drained at its peak some half a trillion from the economy and deposited it at the Fed. The Treasury's general account ballooned to about $150 billion.

  4. An increase in the Treasury's supplemental account would presumably defeat the purpose. Note that the Treasury is still holding $200 billion in that account. The question is why.