Wednesday, December 16, 2009

"Parsing the Fed: How the Statement Changed" and "Fed Statement: Interpreting The New Paragraph"

A Dow Jones twofer. [and a bit o' Climateer's braggin' -ed] First up the WSJ's Real Time Economics blog:

The guts of the Fed’s statement following the December meeting were nearly identical to it November remarks. The central bank continues to scale back emergency programs, but makes no signal that rates are going to rise in the near term. (Read the full December statement.)

December meeting:
Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating.
November meeting:
Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up....

...December statement:
In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth....MORE

This entire paragraph is a new addition to the statement. The pullback from these emergency programs was well known prior to the Fed’s meeting. Scaling back these programs shows that the Fed is moving to a more normal monetary policy stance.

MarketBeat jumps all over that paragraph:
While the key “extended period” language was unaltered, there was a sizable addition to the end of the FOMC statement. It’s an entire paragraph actually, in which the Fed ticks off the various liquidity programs the central bank expects will expire by the start of February. It’s less than riveting reading, but it’s important. If you’re bored to death just skip to the analysis at the bottom of the post...[the Fed's para.]...So what’s with this litany of liquidity programs? What is the message the Fed is trying to get through? ”They are affirming that these programs will go away as scheduled — per the June release — so reminding us that they are exiting in many ways,” wrote Credit Suisse rates strategist Carl Lantz. “[It's] a way of telling the market that there is a lot more going on than the funds rate and just because they plan to keep that low for a long time doesn’t mean they aren’t reacting to the improvement in conditions....MORE
We pointed out the problem to our readers on Nov. 5 and to MB's readers in a comment on their post:
Raising Rates Wouldn’t Kill Stock Market


True enough.
However there’s another consideration:
“Treasury Minutes Suggest Fed to Remove $1 Trillion in Excess Reserves by March 2010″