Wednesday, December 15, 2010

What the Fed Said

The Lehmann Letter ©

Yesterday the Federal Reserve’s Open Market Committee expressed disappointment with the recovery’s pace and clearly stated its intent to maintain an expansionary monetary policy:

Here’s what the Fed said:

“Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed…..

“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November….

“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 for the federal funds rate for an extended period….”

You don’t need a Ph.D. to understand. The Fed wants a stronger recovery, doesn’t see that happening soon and therefore will hold down interest rates until the economy shows sufficient improvement.

As readers know, this letter fears that low rates are like pushing on a string: Not very effective. But what else can the Fed do, other than lead the horse to water?

© 2010 Michael B. Lehmann

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