This is actually a pretty interesting Fed statement when you read into the changes a bit. First of all, I think it’s a good move by the Fed to avoid jumping to conclusions here regarding re-implementation of QE. It was my opinion last autumn that the Fed panicked over a few weak datapoints and felt compelled to soothe the emotions of the crying baby that is the markets. As any good parent knows you don’t give a baby a piece of candy every time they walk by the candy stand and start crying because they want some. In fact, spoiling the child in this instance implants a very destructive psychological expectation that leads the child to believe that it doesn’t need to behave prudently or rationally because they can always get what mommy or daddy will give to them so long as they cry. The markets, though not perfectly analogous, are similar. Implanting destructive expectations leads to an environment ripe for ponzi economics.
But there is an interesting portion of the statement that is far more specific than the Fed has been in the past:
“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.”
This could be read in several ways. I read it as an explicit admittal that we are confronting an extraordinarily odd pervasive recession. Could Ben Bernanke be more aware of the balance sheet recession than I’ve previously assumed? I am probably reading into it too much…but more importantly, the statement could be a change in direction towards more unconventional policy. Specifically, we could see the Fed move in the direction of NGDP targeting. This sort of specific outline is a logical first step in that progression. I tend to be in the camp that views NGDP targeting as voodoo economics (or confidence fairy economics), but Ben Bernanke has shown in the past that he is not against this sort of policy. This could give the market the impression that the Fed is not yet out of bullets.
All in all, I think this was a prudent statement. The Fed is not overreacting to the recent market downturn, but they’re maintaining their accommodative position. Unfortunately, I just don’t think there’s that much they can do so while it would be great to see them communicate this more effectively by asking Congress for more aid, I guess this is about as good as it gets. Much is asked of Ben Bernanke and he simply does not have the tools to combat this balance sheet recession. The sooner he realizes this and communicates it to Congress, the sooner we can overcome irrational fears of becoming bankrupt and not being able to help the American public.
Update – The 3 dissenters is also interesting and could signal a possible apprehension towards future stimulus….