Fed Statement: Interpreting The New Paragraph
While the key “extended period” language was unaltered, there was a sizable addition to the end of the FOMC statement. It’s an entire paragraph actually, in which the Fed ticks off the various liquidity programs the central bank expects will expire by the start of February. It’s less than riveting reading, but it’s important. If you’re bored to death just skip to the analysis at the bottom of the post:
In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.
So what’s with this litany of liquidity programs? What is the message the Fed is trying to get through? ”They are affirming that these programs will go away as scheduled — per the June release — so reminding us that they are exiting in many ways,” wrote Credit Suisse rates strategist Carl Lantz. “[It's] a way of telling the market that there is a lot more going on than the funds rate and just because they plan to keep that low for a long time doesn’t mean they aren’t reacting to the improvement in conditions. It implies a separation of liquidity and rate policy that suggests the latter can stay lower longer.”
Other Fed watchers also chimed in with their takes on the Fed’s catalog of expiring liquidity programs. “In lieu of a genuinely new addition to the Fed’s exit strategy, the approach is instead to recycle some old news to emphasize that steps are indeed being taken to unwind certain extraordinary actions,” wrote Eric Lascelles, chief economics and rates strategist at TD Securities.
Find the original story at WSJ MarketBeat:
Fed Statement: Interpreting The New Paragraph
