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Explaining What The Federal Reserve Did In Plain English (January 28, 2009 Edition)

Parsing the Fed January 28 2009

The Federal Open Market Committee voted to leave the Fed Funds Rate unchanged today.  It remains within a target range of 0.000-0.250 percent.

In its press release, the FOMC reiterated most of the key points from its December 2008 statement, including:

  • The U.S. employment outlook continues to deteriorate
  • Consumers and businesses continue to cut spending
  • The housing sector is still showing weakness

In addition, the FOMC addressed the “extremely tight” credit conditions for U.S. households and business, even as it said some financial markets are showing signs of improvement.

To the Fed, the latter is a precursor for the former.  For Americans needing new mortgages or other forms of credit, it may mean that getting approved gets easier sometime late this year.

Most importantly, the Fed’s press release again mentioned the policy-setting group’s intention to “employ all available tools” to promote economic growth.  This includes the open-market purchasing of mortgage-backed debt that has helped fuel the current Refi Boom. The Fed indicated a willingness to extend the program beyond the initial $500 billion, if necessary.

For each of the Fed’s interventions, though, there is a trade-off.

Buying securities costs money and the Fed — literally — comes up with the cash by printing it.  The extra supplies devalue the U.S. dollar which, if left unchecked, can cause the Fed’s plan to backfire in the form of runaway money supply-led inflation.  The Fed is aware of this risk and is pledged to monitoring it closely.

Overall, mortgage rates worsened today after the Fed’s statement.

Source
Parsing the Fed Statement
The Wall Street Journal Online
January 28, 2009
http://online.wsj.com/internal/mdc/info-fedparse0928.html

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