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Tuesday, August 10, 2010

Fed Funds Rate Kept Constant; View Of Economy Less Upbeat – Will Roll Over MBS Holdings

The Federal Open Market Committee voted to keep the Federal Funds Target in a range between 0 and 25 basis points. In addition, the Fed indicated that in order to “support the economic recovery,” it will keep constant the current level of securities on its balance sheet by reinvesting the principal payments of agency and agency mortgage-backed securities in longer-term Treasury securities. This is looser monetary policy relative to the previous plan of allowing the balance sheet to contract as securities mature, yet is a step to shift the composition of the Fed's balance sheet closer to its traditional holdings of mainly Treasury securities.

The general mood of the committee regarding the economy was more pessimistic this time around:
Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. … the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

As of the sending of this e-letter, the stock market reacted bullishly, with the DOW Jones Industrial Average rising 50 points. The bond market also rallied, with the ten-year treasury falling about 25 basis points to 2.80 percent.

There was one vote against the policy statement coming from Thomas M. Hoenig. He judged that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee's ability to adjust policy when needed. In addition, he objected to the Fed keeping its balance sheet constant.

Key statements new to current release in RED. Key statements removed relative to prior release in BLUE.
















































August 10th Meeting




June 23rd Meeting


Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.
Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.



























Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.



























The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.



























To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.


































The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.



10.04.28 (Source: Federal Reserve)

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