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Wednesday, September 21, 2011

Federal Reserve: "Economic Growth Remains Slow" (GDP Charts) *Operation Twist Announced*

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Marriner S. Eccles Federal Reserve Board Building in Washington, D.C.
"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability."


USA Economy The Federal Open Market Committee issued a statement on Wednesday, September 21, 2011 after a meeting on monetary policy (at the bottom of this page). The FOMC revised their September statement to, "economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated." This is a continuation of the previous statement regarding the USA economic recovery and USA labor market from the previous August statement. The FOMC also noted, "there are significant downside risks to the economic outlook, including strains in global financial markets".

Economic Recovery Now "Remains Slow" Now the FOMC is saying the recovery is "remains slow" after stating in August the recovery was "considerably slower". The Federal Reserve previously, for months, utilized the wording and theme of "modest" and "moderate" regarding economic activity, recovery, and growth. In November 2010, this was changed to "slow": slow pace of recovery in output, slow pace of recovery in employment, disappointingly slow progress in FOMC objectives. In December 2010 and January 2011, economic activity, recovery, and growth was "insufficient". In March 2011 the FOMC was saying the economic recovery was on "firmer footing". Then in April and June, the FOMC was back to "moderate". The FOMC statement is carefully worded.

Operation Twist: Maturity Extension Program and Reinvestment Policy The FOMC announced the anticipated Operation Twist: "Under the maturity extension program, the Federal Reserve intends to sell $400 billion of shorter-term Treasury securities by the end of June 2012 and use the proceeds to buy longer-term Treasury securities. This will extend the average maturity of the securities in the Federal Reserve’s portfolio. By reducing the supply of longer-term Treasury securities in the market, this action should put downward pressure on longer-term interest rates, including rates on financial assets that investors consider to be close substitutes for longer-term Treasury securities. The reduction in longer-term interest rates, in turn, will contribute to a broad easing in financial market conditions that will provide additional stimulus to support the economic recovery." This does not monetize additional USA debt but reallocates the existing U.S. Treasury debt owned by the Federal Reserve.

Quantitative Easing The Federal Reserve had previously utilized quantitative easing, or QE1, during the depths of the Great Recession - and those amounts are still on the Fed balance sheet. A second round of quantitative easing, or QE2, was then implemented - and those amounts are also still on the Fed balance sheet. The total of QE1 was near $1.4 trillion in longer-term U.S. Treasury securities. The total of QE2 was $600 billion in longer-term U.S. Treasury securities. Now $400 billion of those existing holdings will be shifted from shorter-term to longer-term via Operation Twist.

Indirect Quantitative Easing In the August 10, 2010 statement, the FOMC began an indirect form of quantitative easing, separate from QE1, QE2, or Operating Twist by "reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature." This is quantitative easing without increasing the Fed's balance sheet. The FOMC continues to affirm this policy at each subsequent meeting, "The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings and is prepared to adjust those holding as appropriate."

Zero Interest Rate Environment Until Mid-2013 The FOMC continues to "maintain the target range for the federal funds rate at 0 to 1/4 percent" but added in August 2011, "The Committee 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 Federal Reserve cut the federal funds rate to near 0% in December 2008, over 2 3/4 years ago.


Here's the Federal Reserve's Problem - Inadequate USA GDP Growth

GDP Revisions The Bureau of Economic Analysis, on July 29, 2011, significantly revised the USA GDP from Q3 2008 through Q1 2011. This revised data revealed a deeper Great Recession and slower recovery. This also undoubtedly caused the FOMC in August to downshift their wording regarding the recovery. See charts below.

USA Real GDP % by Quarter (Chart) The chart below is the annualized percentage change of the Real GDP (seasonally adjusted at annual rate) from the preceding quarter (QoQ), from Q1 2008 through Q2 2011. The original Bureau of Economic Analysis GDP data is in blue. The revised Bureau of Economic Analysis GDP data is in red. An initial negative drop occurred in Q1 2008, but was followed by a positive bounce in Q2 2008. A negative drop into the Great Recession began Q3 2008 at the time of the USA Financial Crisis, followed by a steep decline, and bottom, in Q4 2008. The deepness of the Great Recession continued in Q1 2009. The Great Recession continued for 4 quarters until Q2 2009. Positive GDP growth resumed in Q3 2009, the rebound peaking in late 2009 and early 2010. The Q1 2010 GDP of +3.9% is now the recent recovery peak.


USA Real GDP % by Year (Chart) The chart below is the annual percentage change of the Real GDP (seasonally adjusted at annual rate) from the preceding year (YoY), from 2004 through 2010. The original Bureau of Economic Analysis GDP data is in blue. The revised Bureau of Economic Analysis GDP data is in red. USA GDP peaked in 2004 at +3.5%, the highest since 2000 (+4.1%). GDP decreased 5 consecutive years. The Great Recession is evident beginning in 2008 at -0.3% and 2009 at -3.5%. 2010 GDP recovered to +3.0%, a 5-year high (2005 = +3.1%).



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Federal Open Market Committee Statement

Federal Open Market Committee
Release Date: September 21, 2011

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. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.

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 Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

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.

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.

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.


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