Fed on Hold

The Federal Open Market Committee (FOMC) offered little today that is new.  Additional mortgage-backed security (MBS) purchases will continue until unemployment falls “substantially” which, given Chicago Federal Reserve Bank President Charles Evans’s influence on the committee, suggests that will be the case until we see the unemployment rate dip below 7% for a period of time. That, coupled with what are likely to be additional Treasury purchases to offset the end of the “Twist” in December, would likely add another $1 trillion (at least) to the Fed’s balance sheet.

Of course, the Fed would love to stop short of such an additional expansion of the balance sheet. Our forecast, however, suggests it may be even more than that.

Richmond Federal Reserve President Jeffrey Lacker dissented, per usual. Look for the FOMC to move away from arbitrary calendar dates on easing (currently mid-2015) after Evans rejoins the voting ranks in January, 2013. Dissenters have lost some of their power as their inflation fears have not materialized; and, they have not been able to offer their colleagues a viable alternative to the current strategy. Doing nothing is not an option for most members of the Fed as it would mean that they are not adhering to the law or their “mandate.”

Bottom Line: The Fed is willing to offer a life raft of certainty for investors in an ocean of uncertainty. Board members would gladly back off if the rest of Washington would do its job and come up with a credible, back-loaded, deficit reduction plan. Until then, this Fed appears willing to not only fill the punch bowl, but leave it out until a few investors get tipsy.

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  1. Sarena
    Posted December 23, 2012 at 11:18 pm | Permalink

    I liked your post Fed on Hold. Its surprising to know about Fed is willing to offer a life raft of certainty for investors in an ocean of uncertainty. For this you first need to improve your home. Thanks for writing this article

    • Diane Swonk
      Posted January 4, 2013 at 5:44 pm | Permalink

      People are remodeling before moving up as they are more willing to invest in an asset that is appreciating again. Home values are still a far cry from where they were, however, and few would like to “realize” the perceived loss from the peak. Hence, the bias to remodel over selling.

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