U.S.: The FOMC Cuts to Zero and Changes Gears

• The Fed cuts the fed funds rate sharply to a target of 0.00-0.25%.
• The tone of the statement was decidedly dovish, and commits to an extended period of low rates.
• The Fed explicitly mentions unconventional measures that it will undertake to ease monetary policy further.

The U.S. FOMC (unanimously) decided to reduce the fed funds rate by 75-100bp, taking it to its lowest level on record at a target of 0.00-0.25%. The Fed will no longer pursue a specific point target for the fed funds rate, but instead will target a narrow range.

The statement provided the clearest indication that the Fed will engage in unconventional monetary policy tools. Indeed, the statement was a dramatic departure from the past in noting that “the Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.” It later says “the Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.” Finally, it says quite explicitly that the FOMC will “stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level.” And while the Fed does not explicitly mention the word quantitative easing, all of this points in that direction.

It goes on to say that “the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.” This is an unequivocally clear indication that rates will remain low for the foreseeable future. The pursuit of low rates will occur not just at the short end of the yield curve, but also further out via the aforementioned buying of agency and MBS debt, plus the possibility of buying longer-dated Treasuries.

Not surprisingly, the economic assessment was fairly dovish as the Fed noted that since the last meeting, labour market conditions have deteriorated further, while consumer expenditures, business spending and industrial production have all declined. The statement noted that the economic outlook has “weakened further” since the last meeting. In terms of inflation, the Fed noted that inflationary pressures have “diminished appreciably”, and goes on to state that the “committee expects inflation to moderate further in the coming quarters.” In a sense, the inflationary fears have now been waved off by the Fed.

The bottom line, then, is clearly that the Fed will keep the fed funds rate at 0.00-0.25% for a sustained period of time and will engage in unconventional monetary policy both in the form of quantitative easing and the buying of securities, all in an effort to resuscitate the ailing U.S. economy.

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.