So today was the big lift off day. The FOMC decided to raise the FF rate by 25 basis points. The DOW sagged a little as the statement was released, but began about 150-point gain at 2:30 PM eastern time. Some MM’ers have suggested the late rally was the result of something Janet Yellen may have said in her press conference afterward. Though I have watched the video and cannot pick out anything in particular that sounds like expansionary policy queues, as well as noting that Yellen’s press conference did not get under way until after 2:30 PM eastern according to the CSPAN timestamp on the video.
I then looked at the statement and noted this one difference:
The Committee 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 and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
In the October statement this is what was communicated about the base:
The Committee 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 and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
A while back I wrote a post about Bernanke’s statements on how the base-bloat would likely be unwound. He said that the FOMC were likely to allow the securities to mature rather than selling them off in short order. And while it wasn’t a promise to permanently expand the base, since QE 2 and 3 were done with long-dated Treasuries it is close to a promise of permanent base expansion. After all, in 30 years I just might be ready for the old folk’s home.
So really, what I can tell that happened today is that the FF rate was raised, but the base isn’t being lopped. They are, I think, futzing around with the credit channel, just a teeny tiny bit as the effective FF rate has been as high as 0.38% within the last 18 months as reported in the weekly Reuters Fed operations reports and the rate set today is within that range. In short, the FOMC action today appears to have been more ceremonial than real because at the end of the day what matters is what they are doing with the base vs. demand for money (otherwise, I’d have some not very nice things to say about the Fedborg about now.). We will have to wait and see what NGDP and markets look like and what the economy feels like in the days ahead for confirmation.
PS: Donald Trump’s latest proposal to violate the Constitution’s prohibition of corruption of blood is more than appalling. The sliver of respect I recently held toward him is now completely gone. I never liked Ted Cruz at all, but I am very likely to switch my support from Rubio to the Cruz camp since he has been the only one of the candidates to nail Yellen for the Fed mistakes in 2008.
[Update] They did, however, increase IoER from 0.25% to 0.50% – not good. Perhaps Yellen did a good job of convincing that the FOMC has our backs?? She did talk about the “neutral” rate, spelling out that they are aware of what that is. But it was interesting to watch the double take, a sort of ‘I can’t believe I said that’ kind of expression fall upon her face when she talked about the the growth path of the economy needing to stay put as a reason for raising interest rates now. Yeah, I too can’t believe she alluded to us not missing what we’ll never have because of the horrors of overshooting even just a little. Just think, Reagan would have chewed her a new one, and probably would have had monetary policy being run out of the Treasury after a statement like that.