FOMC Review

Whoever is charged with the task of writing the FOMC statement has a pretty easy job these days.  The wording between the June directive and the August directive was nearly the same, with a few exceptions that didn't take much to work out.

For starters, many of the key statements were identical:

--the Committee expects inflation will remain subdued for some time

--economic activity is likely to remain weak for some time

--economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period

Some of the subtle differences include a mention of "sluggish income growth" as one of the reasons why household spending will remain constrained.  That was absent from the June directive, which also included references to ongoing job losses, lower housing wealth, and tight credit.

Additionally, the latest directive indicated a belief that economic activity is "leveling out," whereas, it was said in June that the pace of economic contraction is slowing. 

This view will be interpreted as an upgraded assessment of economic conditions, but ultimately it is simply a statement of fact as presented by the second quarter GDP report which showed a -1.0% annualized rate of decline versus a -6.4% annualized rate of decline in the first quarter.

The biggest change, arguably, involved the language used to discuss the Fed's plan to purchase $300 billion of Treasury securities.  Unlike the Bank of England, which surprised everyone with an announcement that it was going to increase its budget for purchasing gilts, the Fed didn't provide any major surprises.

It did provide a slight wrinkle, though, saying that it anticipates the full amount of Treasury securities will be purchased by the end of October, as it gradually slows the pace of these transactions to allow for a smooth transition in markets to a time when the Fed's purchases have been completed.  Prior to the FOMC decision, the pace of purchases had suggested the Fed would likely be done with its purchases in September.

The June directive, incidentally, said the Fed will buy up to $300 billion of Treasury securities by autumn. (You can't be considered a government agency, of course, if you don't spend at least the full amount of an allocated budget.)

In any event, the market's overriding expectation remained the same, which is that the Fed wouldn't add to the purchase budget and would keep the qualifier that it "...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."

On a related note, the Fed reiterated that it will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year.  

We'd like to say there were some earth-shaking revelations in the August directive, but there weren't. 

The directive was scripted pretty much as the market anticipated.  Accordingly, the FOMC decision didn't do anything to upset the bullish bias seen of late which has been predicated on a hopeful view of recovery prospects.

--Patrick J. O'Hare, Briefing.com