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Decoding the Fed

Thursday, September 24, 2009, 11:53 AM

The Federal Reserve policy statement yesterday was a masterful blend of contradictory words and ideas.

Nonetheless, the markets reacted with great volatility to these words, as though there was some useful information within them.   You can read the entire statement for yourself here at this link. 

To save you the trouble, what I've done is chopped the whole statement up into smaller sections and translated them (with tongue in cheek, but only slightly):


Item #1

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn.

Translation:  "Yes!  In the best spirit of government intervention, we've turned $3 trillion in direct spending and $ 8 trillion in future taxpayer promises into a barely detectable statistical uptick.  Not just anybody could do that."


Item #2

Conditions in financial markets have improved further, and activity in the housing sector has increased.

Translation:  "Well, housing jolly well should have picked up, considering we bought more than 100% of all issued mortgages in 2009 at market-distorting prices."


Item #3

Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.

Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.

Translation:  "Oh, all that other stuff we just said about the economy stabilizing and picking up?  We meant it, just not for households and businesses.  Besides those two areas, we meant."


Item #4

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

Translation:  "Oh, one more thing about that "economy stabilizing and picking up" stuff.  We meant "stabilizing and picking up" to be synonymous with the concept of remaining weak for an extended period.  We apologize in advance for any confusion this may cause." 


Item #5

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.

Translation:  "All those mysterious Treasury purchases from Caribbean banking centers and the economically ruined island nation of the UK are going to continue.  And, yes, we will fight being audited, tooth and nail."


Item #6

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.

Translation:  "Okay.  Forget what we said earlier about the economy stabilizing and picking up.  It actually stinks, and we've just told you twice now, so quit asking us about it.  Again, we apologize for any misunderstandings our previous words may have caused.  Also, we are going to continue to flood the world with nearly endless amounts of nearly free money.  Please plan accordingly."


Item #7

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 $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.

Translation:  "...they are going to continue forever."


Item #8

As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. 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.

Translation:  "We are going to buy a lot more stuff, whenever we feel like it.  The Cabella's Master Trust credit card receivables we accepted a while back should give you an indication of where we are headed with all this.  Frankly, we headed into this massive program of asset purchases with no exit strategy at all and what we are telling you now is that we still don't have one.  Please plan accordingly."

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6 Comments

crash_watcher's picture
crash_watcher
Status: Silver Member (Offline)
Joined: Aug 12 2008
Posts: 146
Re: Decoding the Fed

I don't speak "FED" very well, but I wonder if this is a reasonable translation?

Citing that same FOMC release (http://www.federalreserve.gov/newsevents/press/monetary/20090923a.htm):

"With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time."

translation: in the short term we are still more afraid of deflation than inflation

"Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities ... they will be executed by the end of the first quarter of 2010."

translation: between now and the end of Q1 2010, we expect about $1.25 trillion of MBSs are going to default and so we will have buy them.

 

anton95's picture
anton95
Status: Member (Offline)
Joined: Sep 29 2008
Posts: 22
Re: Decoding the Fed

In the UK there's a funny split on this sort of viewpoint.

The banks, analysts, and media, are in full-blown green shoots mode.

The government is being very very careful to not endorse that, and the Bank of England is speaking neutrally but acting bearish (continuing quantitative easing, rates at historic low etc).

The key to the BofE and the Fed here is to ignore the words and follow the actions (CM spoofs this beautifully). They are not behaving like we are recovering, and they have access to better data.

SkylightMT's picture
SkylightMT
Status: Silver Member (Offline)
Joined: Sep 30 2008
Posts: 125
Re: Decoding the Fed

Great post, Chris! Thanks for setting things straight.

mainecooncat's picture
mainecooncat
Status: Gold Member (Offline)
Joined: Sep 7 2008
Posts: 488
Re: Decoding the Fed

Good show, Chris. I gotta admit, this is absolutely hilarious. On the serious side, Items 1 and 7 are lion's roars of truth.

Regarding Item 1, I listened to a radio show this morning on the ride to work that supposedly was going to address the state of the economy. All three guest economists were decidely rosey with the "doom and gloomer" being only sort of rosy -- the relativity of optimism/pessimism was really on display. But the amazing part was that there was no mention or understanding of the unprecedented stimulus being the cause of the statistical murmur regarded as "the recovery."

bobb dobbs's picture
bobb dobbs
Status: Bronze Member (Offline)
Joined: Apr 22 2008
Posts: 31
Re: Decoding the Fed

from Item #7:

"The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010."

I'd expect them to get got lots of prison time, no parole, and plenty of public shaming, but they know more about their crimes than I do so perhaps execution is appropriate.

I do want them to have a fair and speedy trial and the first quarter of 2010 seems pretty fast, and maybe... just in time.

Ken C's picture
Ken C
Status: Platinum Member (Offline)
Joined: Feb 13 2009
Posts: 753
Re: Decoding the Fed
bobb dobbs wrote:

 from Item #7:

"The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010."

I'd expect them to get got lots of prison time, no parole, and plenty of public shaming, but they know more about their crimes than I do so perhaps execution is appropriate.

I do want them to have a fair and speedy trial and the first quarter of 2010 seems pretty fast, and maybe... just in time.

Bobb,

That was a good laugh - thanks,

Ken

 

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