Comments on 12/16/08 Fed Announcement
Source: SCM Advisors - December 16, 2008
December 2008

Maxwell Bublitz, Chief Strategist of SCM Advisors, says the Fed lowering target rates today indicates that quantitative easing is alive and well.

Quantitative easing is alive and well at the FOMC. Today’s post-meeting statement not only lowered the target rates – by at least 75 basis points - it also indicated that policymakers will no longer have a target rate, but will now utilize a target range. This is essentially a de facto admittance of what was already obvious to everyone; that the Fed had lost control of the effective fed funds rate relative to the target.

The statement also indicated policymaker’s intentions to purchase longer-dated Treasury securities, but fell short of describing how far out the Treasury yield curve they would go. Most of the market’s immediate interest seemed to fall in the 5 -10 year area, continuing the recent trend of a bullish flattening of the yield curve. In probably the most important part of the statement, the FOMC made it clear they “will employ all available tools” to anchor Treasury rates at “exceptionally low levels” for some time in an effort to kick-start the weakest domestic economy in decades. Anchoring Treasury rates at low levels for an extended period of time is the first step in bringing down the stubbornly high private sector borrowing rates needed to get the moribund credit creation process moving again.

The vote was unanimous – which probably took most of their two day meeting to accomplish – and suggests that Bernanke is exerting more control than he has at any other time in his tenure as Chairman… I wish he started a year ago. But in my view, today’s statement is merely the starting point for a much broader campaign of communicating the details of exactly how monetary policy will be implemented within a quantitative easing framework.