Monday, April 30, 2012

Fed Watch

The FOMC held a two-day day meeting. April 24-25, to discuss the state of the economy and monetary policy and with only a slightly more optimistic view of the future, did not change policy. A number of the members of the committee believe unemployment will fall lower than they had predicted earlier in the year, despite the continued slow economic recovery. Despite this belief, the FOMC did not change its policy stance. Short term interest rates will continue at about zero. The committee reiterated their previous statement that the low interest rate policy will not change until late 2014.

The FOMC projects unemployment at about 8% at year end and they continue to believe that inflation will stay below 2%. Their position on interest rates has not changed since their March meeting. I have reproduced some of the statements from that meeting below. The FOMC is committed to keeping short and long term interest rates at record low level, despite increased criticism from Congress. There have always been members of Congress ready to criticize the Fed, but this criticism seems to be stronger in recent months. This story continues to develop.
From March 13, 2012 meeting:
The FOMC has recently clarified its position on inflation and Operation Twist. In its February 29, 2012 Semi-annual Monetary Policy Report, they reiterated that the “security lengthening” known as operation twist which began in September will continue through the spring. Comparing 2007 to 2012, the Fed’s Treasury security portfolio has changed significantly. This is Operation Twist; the Fed is holding a much larger share of longer term securities and much smaller share of short term securities. It is scheduled to end in June. The effect of operation twist has been a significant reduction in long term interest rates, such as the mortgage rate being below 4%.

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

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