FOMC Close But No Cigar For Treasury Buying

• The FOMC kept the fed funds rates steady and reaffirmed its commitment to keeping rate exceptionally low.
• President Lacker dissented, preferring the Fed to start purchasing Treasuries Immediately.
• Fed hints at its willingness to expand balance sheet further.
• Concerns were expressed about the downside risks to inflation and growth.

Not surprisingly, the FOMC kept the fed funds rates steady and reaffirmed its commitment to keeping rate exceptionally low for some time. The Committee seemed to have advanced the discussions on the purchasing of Treasuries, and although it did quite commit to this today, it appears that it is only a matter of time before it does so. To this decision, Richmond Fed President Lacker dissented, favouring instead that the Fed immediately embark on expanding the monetary base by buying Treasuries.

The economic assessment of the Committee remained grim, with the Fed noting that “industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending”. However, the Fed stated that it anticipates “a gradual recovery in economic activity will begin later this year”, though it considered the risks to the economic outlook to be to the downside.

On the inflation front, the Fed noted that it expects inflation to remain subdued on account of the growing economic slack. And the statement goes on to express the Committee’s concerns about the risks that inflation could remain below the levels deemed to be appropriate to foster economic growth, which suggests that the Fed will stand on guard against any deflationary spiral.

As expected, the Committee did give a nod to the improvements in financial market conditions since the last meeting. However, it did note that “credit conditions for households and firms remain extremely tight.”

In the final analysis, with the fed funds rate effectively at zero and its efficacy in stimulating the U.S. economy impaired by the dislocations in the U.S. financial sector, it is now clear that the Fed is welling to pursue more unconventional approaches to monetary policy implementation. In contrast to the prior statement in which the Fed noted its desire to sustain the size of the balance sheet at a high level, the Fed has now expressed its willingness to outright expand it. And in addition to its commitment to expand credit facilities and purchase large quantities of agency and MBS debts, the Fed is now willing to embark on purchasing longer-dated Treasuries if certain conditions are met – which we believe will occur in due course.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.