“Fed To Hold Rates Near Zero” is the news headline today.
It is not really news. What were they supposed to do? They can’t increase the rates. Zero is as low as you can go.
There were about six notable items in the announcement.
1. The description of credit conditions changed. December 16, 2008 read: “markets remain quite strained and credit conditions tight.” January 28, 2009 reads: “credit conditions for households and firms remain extremely tight.” The key word is “extremely”. I am glad the Fed is on the same page as the rest of us now.
2. They are very worried about deflation. This is a big one. December 16, 2008 read that the Committee expected inflation “to moderate further in coming quarters.” That’s hugely different from January 28, 2009: “inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.” This also gives extra emphasis to keeping interest rates low for a long period of time as well as expanding the balance sheet for a longer period of time. In short, they want to stamp out deflation.
3. Looks like they will buy long-term Treasuries. In December, they were “evaluating the benefits”. Now on January 28, 2009 they say “The Committee also is prepared to purchase longer-term Treasury securities…” Buying Treasuries will reduce interest rates. But hey, the 10-year bond is trading at 2.6%. It is already rock bottom. What we need is a reduction of risk premia. That can only happen if they buy risky assets.
4. Other notables are the fact that they ” are likely to keep the size of the Federal Reserve’s balance sheet at a high level”. Again, that spells inflation. Expect to see longer-term inflation expectations (as reflected in inflation-indexed bond) to increase.
5. There is no change in the all available tools language. Both December 16, 2008 and January 28, 2008 use the identical language: “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.” No news here.
6. It was a split vote. In December, it was unanimous. However, I don’t think the split is that notable. Lacker simply preferred to target Treasuries rather than the credit programs.
Overall, the announcement today did not offer any new ideas. That is disappointing.