The Federal Reserve raised the interbank borrowing rate today by one quarter of one percent or 25 basis points. Readers are asking, “what does that mean?”
The Federal Funds rate is still effectively zero. Surprise. Since 2008 the Fed has keep interest rates an unprecedented effective zero, giving a free ride to big debt and Wall Street. The phrase that pays from the Fed is a highly accommodative policy.
Wall Street was all aghast that their quantitative easing was about to disappear. The FOMC decided to taper in January and now stocks soar. Why? Because the taper is minimal and the FOMC announced the federal funds rate will remain an effective zero for much longer than previously estimated.
The Federal Open Market Committee is not going to stop quantitative easing just yet. This is no surprise considering the weak economic conditions and as we pointed out, an inflation rate below expectations. The risk of deflation is real.
The Dow hit a record high yet for most of America this means little. While some fawn and fan over the high rise stock market, here are some stories that actually matter to real people with real lives.
There is nothing more frightening than when those in charge of the economy miss something that was as plain as the nose on your face. Such was the situation with the Federal Reserve and the subprime mortgage crisis in 2007. The FOMC met on August 7th and claimed there was not enough evidence of a subprime problem.
The FOMC just did a great thing. The Federal Reserve tied interest rates and quantitative easing to U.S. labor. The messaging alone is powerful. The Federal Reserve is saying, very clearly, U.S. workers matter. Businesses need to start hiring and increasing wages if they want to actually improve the overall economy.
About 5 million people—more than 40 percent of the unemployed—have been without a job for six months or more, and millions more who say they would like full-time work have been able to find only part-time employment or have stopped looking entirely. The conditions now prevailing in the job market represent an enormous waste of human and economic potential.
More quantitative easing is here. The Federal Reserve will increase purchases of mortgage-backed securities and agency debt by $340 billion by December 31st, 2012. From the FOMC statement:
The Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.
The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year
More astounding is the promise to continue to make MBS purchases until the employment rate is acceptable.
If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
For those once again thinking they were getting their crack cocaine, quantitative easing, once again they are disappointed.
The FOMC statement showed no change in policy from the Federal Reserve. For the rest of us, the FOMC statement acknowledges our crappy economy.
Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.
Additionally the Fed doesn't expect things to really improve:
The Federal Reserve will extend their Operation Twist past the June 2012 deadline and downgraded the economic outlook. Originally Operation Twist was $400 billion in Treasuries that were maturity dates of 3 years of less turned into T-bills with maturity dates of 6 to 30 years.
There is nothing more frightening than when those in charge of the economy miss something that was as plain as the nose on your face. Such was the situation with the Federal Reserve and the subprime mortgage crisis in 2007. The FOMC met on August 7th and claimed there was not enough evidence of a subprime problem.
For those once again thinking they were getting their crack cocaine, 
The Federal Reserve will
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