FOMC Affirms Monetary Action Plan In Statement
The Federal Reserve's Federal Open Market Committee released its January meeting statement this afternoon. Little of it was shocking, but some of it was notable. It intends to go ahead with its plan to end most of the credit facilities, created during the financial crisis, in the first quarter. It also continues to see the economy strengthening. I have a few observations.
Here's what the FOMC says about the economy:
Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating.
I suppose it does look like the labor market's deterioration is abating, but I worry that could be seasonal. I'd like to see what happens over the next few months to see if the layoffs are really almost over. As I noted this morning, it doesn't appear that way. They also say that inventories are coming into line with sales, but lending continues to contract.
As for its decision to go ahead with closing its credit facilities: I remain skeptical. The Term Asset-Backed Securities Loan Facility will be closed as of February 1st. That's in a few days. To my knowledge there have been very, very few successful securitization deals since the financial crisis that did not utilize the TALF. Can the securitization market really function without it at this time? I'm unconvinced, but according to the FOMC:
The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.
So its plans aren't written in stone. If credit suddenly starts contracting, then it could bring these facilities back. That action, I think, would be very, very dangerous. It could scare markets a lot. That's why I wonder if it would have just been wiser to let them continue a little bit longer, just in case. The last thing you want is financial panic when everyone realizes that the credit markets still can't fully function on their own.
Possibly the biggest surprise was that it wasn't a unanimous vote. The statement says:
Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.
I take that to mean that he wanted to raise rates. I'm relieved he's the only dissenter, but astonished that there was even one. I think that's madness. If you want to essentially ensure a double dip recession, then you should raise rates. Inflation continues to be exceptionally low, and even if it does creep up a tad over the next year, that's a small price to pay to make sure that unemployment doesn't jump to 13% or so by year's end.