What They Said / What They Meant by Tim McLaughlin
Further dissecting the FOMC release last week with the infusion of QEIII:
The Fed Said:
Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.
The Fed Meant:
In typical Fed fashion, they come out the gate and say that things are kind of/sort of getting better. They’re still worried about the economy. We’re still worried about the economy. The good news out of this paragraph is that prices of things aren’t expected to go up much.
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The Fed Said:
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Fed Meant:
This is the paragraph that people were anticipating more than any other. The rundown: the Fed is going to buy $40 billion more of mortgage backed securities every month. The goal of this incredible tab is to get consumers to feel more confident and for homeowners to refinance or buy houses more cheaply and thus spend more money on whatever people want/need/desire. That’s Macroeconomics 101 for you.
