FOMC


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Karim writes:

Surprise dissent from Lacker who would rather buy Treasuries than utilize the current slew of credit programs (didn’t realize there could be dissents as it related to type of non-traditional easing).

Other notes:

  1. Economy has gotten worse since December
  2. Risk of inflation falling and persisting to unfavorably low levels has increased
  3. Significant downside risks to growth remain

JANUARY MEETING

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee’s policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve’s balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve’s balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.

DECEMBER MEETING

Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.


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21 Responses to FOMC

  1. Mike Norman says:

    Hahaha!

    Knapp, thanks! I didn’t remember this, but I did discern a desire by Shedlock to validate Schiff’s (erroneous) theories when I had him on my show, but I kept telling him to stick to the discussion of Schiff and his clients’ losses.

    Reply

  2. knapp says:

    Mike,

    You probably already know this but Shedlock gave you the Schiff treatment back in July 06 for espousing views found on this blog:

    “Foolish Nonesense:

    On one hand I am disappointed that the FOOL published those articles by Norman. The reason I am disappointed is because those articles are filled with factual errors while espousing the “free lunch” economic thinking that has this country in the mess that it is in. Some of those ideas are not “contrarian”, they are pure nonsense.”

    Reply

  3. knapp says:

    Shedlock himself is the most orthodox Austrian in the blogosphere, employing a strick definition of the Austrian money supply developed by Frank Shostak. He thinks Schiff uses the “wrong paradigm” because it isn’t Austrian enough. Shedlock has also called the markets extremely well (and documents it all on his blog).

    BTW, Shedlock gives props to Warren (who was cited in an Australian research paper on OMO) in a blog post from Nov 2006. I guess he missed the irony:

    OMO is designed to fully accommodate the demand for system-wide liquidity in order to maintain stability in short-term interest rates [not] as a tool to manipulate the money supply.

    Mosler (2002) again finds similar evidence:

    The target [of OMOs] is an interest rate, so the New York Trading desk need only respond to changes in that interest rate. If the federal funds rate trades above its target, for example, it is a simple matter to make funds available at the appropriate interest rate for member banks to borrow on an as-needed basis. There is no functional value to knowing how much the banks need in advance. The Fed can always readily supply, and indeed must supply, any quantity of $US reserves the banks demand at the going rate, or the federal funds rate will not be on target. There is no inherent constraint on the quantity [of money] as the target is the interest rate and the quantity necessarily floats to meet bank demands, so the Fed has no need to “be prepared” for any quantity demanded.

    Reply

  4. Mike Norman says:

    Scott:

    Yes, I mentioned to the WSJ reporter that the title of the story should have been, “Right Forecast by Schiff, Wrong Plan and Wrong Paradigm.”

    Of course I wouldn’t expect him to understand, nor would I expect the WSJ to say that because it operates under the same inapplicable paradigm as Schiff does.

    Reply

  5. Mike Norman says:

    I spoke to Mike Shedlock. It was his original post on his blog that prompted the WSJ piece and he was in direct contact with Scott Patterson who wrote it. Shedlock informed me today that the Schiff story was a complete whitewash. Lots of important and highly damaging details were omitted. Shedlock also told me that on the advice of his lawyer he was no longer going to talk about it. Schiff may have threatened lawsuits, perhaps even against the WSJ.

    Reply

  6. Jim Baird says:

    One of the things I like about the ELR from a political standpoint is that it really has something for everyone. For the left wingers: everyone has a right to make a living (and I can see ELR workers doing a lot of lefty earthy-crunchy stuff like restoring wilderness, etc. – basically, all the stuff that is labor-intensive but for which there is no market) For the right-wingers: no one can slack off – everyone has to at least show up to get paid, no handouts.

    The problem, of course, is that incorrect ideas about finance prevent it from even being on the table. I say we need to work on getting at least one far right and one far left national politicians “in paradigm”, so that we can do a pincer action…

    Reply

  7. Mike Norman says:

    PETER SCHIFF ARTICLE IN WSJ IS NOW ONLINE

    Read it here

    Reply

    Scott Fullwiler Reply:

    Thanks, Mike

    Good start. Too bad no comments on how many others called the collapse in housing. Also, nothing on incorrect paradigm, but not expecting much there.

    Schiff’s suggestion of “decoupling” is laughable. As if somehow the rest of the world will suddenly stop desiring net sales of $500-$800 billion to the US.

    Trivial point . . . but I think one of the disgruntled investors is a college roommate of mine. Same name, same location, same profession. We always argued about economics, so no surprise if so.

    Reply

    Dave Begotka Reply:

    Now we need a show of hands. “Who did lose in the latest collapse?”

    Reply

    Dave Begotka Reply:

    Forgot NOT “Who did NOT lose!

    Reply

    Scott Fullwiler Reply:

    Anyone in Treasuries . . . anyone in the dollar vs. Euro . . . basically anyone that did the opposite of what Schiff’s paradigm suggests did not lose. The investment advice in a crisis is essentially to understand how a sovereign currency works. The problem, of course, is timing. But the advice of the sovereign currency paradigm is to hold the sovereign currency in a crisis.

  8. warren mosler says:

    First, everyone for the most part already has actual health care, but not insurance, so that means we are already ‘affording’ it.

    Second, federal workers already have health care, so extending it to these new workers is all but automatic.

    Third, people who work might tend to need less health care, so this could reduce the real demand for services.

    My variety of elr is to first expand funding to existing govt agencies
    such that they can hire in unlimited quantities but are constrained by the $8 per hour elr wage.

    This can be extended to the state and local level and pretty much do the trick of employing everyone willing and able to work.

    Additional national service employment opportunities can be added as desired.

    Reply

    knapp Reply:

    I was surprised at how little ELR added to the budget, net $50 billion, by your calculations in Full Employment/Price Stability.

    I don’t know when that was written, but have you updated the figures for your latest version of ELR?

    Reply

    warren mosler Reply:

    it will add enough to get the deficit where it needs to be without additional fiscal adjustments to keep the elr pool smaller than it would be today

    Reply

    knapp Reply:

    got it. stop thinking numbers and constraints. deficit floats to where it needs to be.

  9. Scott Fullwiler says:

    I’ll let Warren answer on “how big” the benefits package should be, though certainly some societies can “afford” more than others in terms of inflationary impact. Of course, an intelligently designed benefits package might actually reduce costs of healthcare overall. Though it’s certainly debatable whether the US political system could “intelligently design” much of anything in its current incarnation, universal healthcare, imperfect as it may be wherever it’s been implemented, has been “cheaper” than the US version.

    I’ll just say that, while it certainly comes down to an inescapable political choice at some level, I’d rather debate that than whether we should have ELR at all. Seems we’ve “won” if/when that ever becomes the field of battle. Minsky liked to say there were probably 57 varieties of capitalism, and I can imagine 57 varieties of ELR . . . some better, some worse than others, but virtually all of them undeniably better than using a reserve “army” of unemployed to stabilize the value of the currency.

    Reply

  10. knapp says:

    Scott,

    Very helpful color.

    It seems to me that ELR and all auto-stabilizer policies are essentially monetary policy operations done right, i.e. done in accordance with operational realities. It’s all about how much spending is necesary to stabilize the economy.

    Fiscal policy proper, on the other hand, is about social welfare or how we spend the money. Ideology and power politics rule here.

    My concern is that by introducing universal healthcare into an ELR program, you run the risk of politicizing what should or could be a non-ideological monetary operation. Univeral healthcare is a highly contentious issue to say the least, so the day Republicans get back in office (sometime around 2050 hopefully), goodbye univeral healthcare-ELR.

    Reply

  11. Scott Fullwiler says:

    “I also like the automatic-stabilizer feature of ELR- which avoids the delays and implementation problems of the current fiscal stimulus plan.”

    Yes. FYI, I’ve simulated the plan in a large econometric model and it’s essentially an “automatic” version of functional finance. Also, in addition to avoiding decision/implementation lags of traditional fiscal policy, I noted in the conclusion the following further benefits:

    “If effectively implemented and sustained, the simulations here suggest an ELR program’s stabilization effects could be automatic in the sense that they would not be dependent upon any policymaker’s forecasts, targets, or conceptual understanding of the economy’s functioning—which can clearly have an ideological bent. On the other hand, the effectiveness of an interest rate rule, tax rate rule, or transfer rule would be (or in the case of interest rates, already is) dependent upon the abilities of policymakers to correctly estimate and forecast current versus “potential” or “target” variables, as well as upon their (potentially ideological) perspectives regarding the relationship of policy instruments to ultimate policy objectives. This is so even where a small, somewhat politically-independent decision-making committee can avoid the “decision lags” that plague a larger body such as the U. S. Congress, as already demonstrated by the FOMC.”

    Reply

  12. knapp says:

    Nice plan. It seems to attack the problem in a direct, timely way. And it’s bi-partisan: Republicans can’t complain about tax cuts or letting states spend the money.

    I also like the automatic-stabilizer feature of ELR- which avoids the delays and implementation problems of the current fiscal stimulus plan.

    With regard to the healthcare feature of the $8 national service job, does the ELR wage-rate inclusive of healthcare costs need to remain the floor rate in order for ELR to function properly as a buffer stock? What if Fed healthcare costs rise? Is this inflationary, pushing up non-ELR wages? Or would healthcare services need to be rationed in some way in order to keep the ELR wage-rate as the floor rate?

    Reply

  13. warren mosler says:

    i’d rather see a full payroll tax holiday and a 300 billion check for the states on a per capita basis.

    the fed should announce the 0 ff target is permanent and focus on regulation.

    that would take the risk of future rate hikes out of asset prices so they could stabilize regarding valuations.

    And the Tsy should stop selling secs and let its deficit spending just pile up as excess reserves.

    Not to mention the $8 national service job that includes fed healthcare to use bottom up market forces to promote universal health care

    etc.

    mosler 2012- the return of public purpose

    ;)

    Reply

  14. Mike Norman says:

    The Fed should target stock prices now. For one thing buying stocks would accomplish the same goal of keeping reserve balances at any level they wanted them. More importantly, however, it would inject immediate confidence and be a much more efficient transmission mechanism to the real economy. J.P. Morgan and a group of bankers did this in the panic of 1907 and it was over very quickly.

    Reply

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