The Federal Reserve issued a Statement from the FOMC yesterday following its two-day meeting. They said, "Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated.... Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets."
The Fed continued, "To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate."
They added, "The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time."
In a separate posting, "Maturity Extension Program and Reinvestment Policy: Frequently Asked Questions," the Fed asked, "How is the program expected to affect short-term Treasury rates? Federal Reserve sales of short-term securities could put some upward pressure on their yields, but the effect is likely to be small. The Committee has stated that it anticipates that economic conditions will warrant the current level of the federal funds rate at least until mid-2013. This expectation should help anchor short-term rates near current levels, suggesting that shorter-term Treasury rates should not be significantly affected by the maturity extension program." (See also, Reuters' "Money funds look for yield boost from Fed action".)
The Federal Reserve Bank of New York posted a "Statement Regarding Maturity Extension Program and Agency Security Reinvestments," which said, "On September 21, 2011, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase, by the end of June 2012, $400 billion in par value of Treasury securities with remaining maturities of 6 years to 30 years and to sell, over the same period, an equal par value of Treasury securities with remaining maturities of 3 years or less. The FOMC also directed the Desk to reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities (MBS) in agency MBS."
Finally, the Fed did not announce any change in the payment of interest on excess reserves (IOER). (See our Crane Data Sept. 20 News "Money Markets Worry About IOER Cut; Fidelity's Brown Talks to Reuters", which quoted a WSJ.com article, "Some market participants expect the Fed, in its two-day policy meeting starting Tuesday, to try bolstering the economy by announcing a reduction or complete elimination of the interest it pays banks for storing excess cash at the central bank.") Money market participants had been concerned that this might push Treasury and repo yields into negative territory, so many were no doubt relieved that the Fed apparently didn't make this move.
