Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. 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.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, 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 up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. 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 facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments.
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; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
And the bond market is feeling like a jilted lover. John Jansen discusses the carnage. As this Wall St. Journal article put it,
A surprisingly light-hearted take on the U.S. economy from the Federal Reserve's policy statement sent government bond prices tumbling Wednesday, and yields vaulting to their highest levels for this year.
"Light-hearted"? Well, in a manner of speaking, yes. What with the green shoots and all.
I told my intermediate macro class yesterday to look for signs of a more toward quantitative easing or a ramping up of long term bond purchases (not the same thing--and neither happened). I told them I'd give it odds of 2:1 against. In retrospect, I should have shorted the 10 year! After looking at the GDP data this morning I would have upped it to 4 or 5 to 1 against. The point is that it looks like the Fed is content right now to wait and see how some of the new lending facilities will work. No need for any new stimulus at the moment.
The bond market was hoping for a bit more. The yield on the 10 year stands higher than it did going into the March FOMC meeting (though still historically pretty low--we're talking basis points here). The pattern is striking. After the March meeting, the yield on the 10 year instantly fell 45 basis points (that move really was a surprise) and then gained it back over six weeks.
Bottom line: Seems to me that if we really are turning the corner, it will be interesting to watch the bond market come to terms with it. The Fed will really need to watch its step in announcing any further purchases (or not). They've got a tiger by the tail.
