Economy

The FOMC Policy Statement: Wall Street Reacts

August 9, 2011

5:19 pm, Central

Diane W. Collins

dcollins@marketingweb.com

The Federal Open Market Committee, (FOMC) met today in regular session to discuss US monetary policy.

Questions leading up to the meeting concerned the willingness of the Federal Reserve to offer additional quantitative easing (QE3) in the near term and whether or not the interest rate at which the Fed lends money to member banks would change from the current 0 to 1/4% rate. You can find the FOMC Policy Statement here. The full minutes of the meeting will be released mid-September which you may access here.

The report indicated that the growth of the economy was slower than expected with deterioration in the overall labor market conditions... and an increased rate of unemployment. "The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually... Moreover, downside risks to the economic outlook have increased."

Prior to the meeting some feared an additional round of quantitative easing might take place producing greater inflation risk... The Fed indicated by today's statement that QE3 is not something they contemplate for the immediate future, but left the door open should the economy take a desperate turn. Additionally, the FOMC statement told us the bank rate would remain the same, 0 - 1/4% through mid 2013 indicating a desire to keep interest rates low in hopes of stimulating the economy.

The time frame the FOMC attached to the bank rate was disputed and voted against by three presidents of member banks including Richard W. Fisher, president of the Dallas Federal Reserve Bank. According to several commentators, dissent threw "uncertainty" into the equation signaling Chairman Bernanke may not be readily able to obtain support for his policy going forward. Others hoped the Fed would increase the rate, thereby, forcing banks to lend more. Currently many banks borrow from the Fed at the bank rate and invest the money in treasuries to make a profit. But, this has been countered by the belief that the banks unwillingness to lend may not be as much the problem as the business owners and consumers unwillingness to borrow in this uncertain economy.

Regardless, in relation to its own investment policy the Federal Reserve intends to continue "reinvesting principal payments from its securities holdings." What does that mean? Remember, the Federal Reserve bought Treasury securities during the 2008 crisis in an attempt to prop up the economy ... lots and lots of securities. As those instruments mature, the Fed told us today it intends to continue its policy to "roll the investment." (If it weren't the government they'd call this a Ponzi scheme.)

Wall Street reacted to the FOMC statement with volatility losing ground it had gained in the early morning session. Prior to the release the Dow had climbed back over the 11,000 mark gaining more than 200 points in relation to yesterday's close. However, as one might expect with a VIX over 40%, the unpredictable market rallied by the closing bell. The Dow ended back in 11,000 territory at 11,239.80 up 3.98% over yesterday.

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Economy

The FOMC Policy Statement: Wall Street Reacts

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