Wednesday, August 12, 2009

Don't get too excited 

The Fed has decided that, for now, it may have enough resources deployed to get us through the rest of this recession (which a majority of WSJ forecasters now say is over):
Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

...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 are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.
It's that last line that will create a buzz more than the "leveling out", as it's an indication that the period of quantitative easing may have reached its apex. But let's remember all the steps they've taken. The New York Times points to the $1.25 trillion purchase of mortgage-backed securities as evidence this hasn't come to an end yet. It still is running $100 billion auctions on a regular basis.

So settle down, cowpokes: Just because some panel had a majority call the end to the recession doesn't mean it's over. You might recall them being the same ones who said we weren't in a recession in early 2008, and then there are the guys who keep saying recession until they're right. The Fed isn't withdrawing any liquidity -- they are still adding. All they've said today is that they think they might have added enough.

James Hamilton reminds us of what President Obama said last week, "As far as I'm concerned, we will not have a true recovery as long as we're losing jobs." The President is right; the Fed may want to think more about this.

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