Tuesday, March 16, 2010

Fed: "Things are Bad, Keeping Rates at 0.25% For a Very Long Time"

The FOMC announced today that it is holding Fed Funds rate at 0.25% and says that rates will stay low for an extended period. The markets reacted with a strong uptick at the news, only to be sharply reversed when traders realised what it actually means, in other words, why they need to keep rates so low for so long, a la Greenspan. We know how that ended. Markets are still bouncing up and down at this time.

Look at the charts around 2:15PM:

These are the rates. This is a very scary chart.

FOMC Summary:

Vote was 9-1; The "1" was from Hoenig who dissented, as previous time (says the language on extended period could cause imbalances)

- Discount rate is unchanged ay 0.25%
- Labor market is stabilizing;
- Employers showing reluctance to add to payrolls, but are spending more
- The pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
- Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.
- With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
- Economic activity has continued to strengthen, investment in nonresidential structures is decling; bank lending continues to contract yet financial market conditions remain supportive of growth. Business spending on equipment and software "has risen significantly,"
- To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month.

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