The FOMC Statement: What They Really Said

All She's Got

“Here it comes”

Release Date: September 13, 2012

For immediate release

Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.

In other words all the stuff The Fed has done has not worked.

       Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

In other words what The Fed has done thus far has not worked.

       To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

Ah, now we get to the rub, don’t we?

See, The Fed has no short-term securities left; they’ve basically sold them all, and at the end of “Twist” will have sold them all.  They also own something like 70% of the long end of the curve, and if they buy much more they’ll destroy what little liquidity is left.

So the question is this: Can this do anything positive?

The answer is this: Let’s look at the figures.

Let us assume we get 50 basis points in downward movement from today’s figures — which means a 30 year mortgage goes from ~3.5% to 3.25% for a conforming note.

Let’s further presume that we’re going to finance $200,000.  This produces a payment of $895.48.

If the rate moves to 3.25% then the financed amount rises to $206,317, or about a 3% increase in house prices.

That’s all Bernanke gets out of this, assuming you get 50 basis points — and you won’t, as the 10 year will move up while MBS move down.  You’ll probably get 25 basis points, which means you’ll get a whole 1.5% increase in home prices.

The net effect is null in terms of market impact.

The stock market is up nearly 200 points but the fact of the matter is that Bernanke is lying about the expected results — they are an economic nullity.

This is the reality of the lower boundary; the difference in price support from 5% to 3% is large but as you approach zero the additional movement you can actually achieve becomes smaller and smaller while the required amount of purchases to effect that change becomes larger and larger.

Worse, the potential impact of a dislocation event in the market goes way up as the leverage at The Fed goes up as well.

       The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

No you won’t.  You didn’t this time and you won’t forward either.

       To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

That’s even worse.  The PPI number was smoking and oil is now up 1.25% today, with basically all of it coming after the announcement.

       Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.

This “accomodation” cannot work because for each dollar emitted into the economy purchasing power is debased by the same dollar.  This is an effectivetax on everyone — including saved capital.

But in this case the real problem is that the “impact” from this program is an economic nullity.

Bernanke took this action, in my opinion, in an attempt to find the last few points on the stock market because he knows, as does the rest of the FOMC, that Europe (and China, for that matter) is about to blow — and that we’re simply not making any progress economically. Therefore he felt compelled to “do something”, even if the “something” is economically pointless, simply to avoid the stock market throwing a temper tantrum.

In the end the bottom line is that The Fed has shot its last bullet and it was a dud, as it is simply impossible for them to provide effective policy accommodation at this point in the cycle.

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