Following the trial balloon in last week’s WSJ, the FOMC confirmed that they will keep their balance sheet constant by reinvesting the proceeds of maturing MBS/Agency securities into Treasuries. On the economic outlook, the Fed said “the pace of recovery in output and employment has slowed in recent months” as we expected them to. Instead of saying the recovery will be moderate over time, they said the recovery will be “more modest in the near term than had been anticipated.” Notwithstanding the recent rise in commodity prices, they continue to rely on CPI/PCE and say inflation has trended lower in recent quarters and will be subdued for “some time.” Hoenig disagreed with keeping the balance sheet constant and didn’t think it was required. Bottom line, stocks love an easy Fed and the Fed delivered with what was expected BUT nothing more. The Fed is clearly still worried about the economy and B52 Ben won’t stop.
As the FOMC doesn’t believe the current level of interest rates are low enough to spur economic activity, they said they will focus their buying of Treasuries in the 2 yr and 10 yr maturities and will begin on Aug 17th. Their balance sheet will technically stay constant in $ value so there isn’t any new ‘money printing’ but the direction the Fed has chosen, the continued desire to suppress interest rates, is an asset price’s best friend as who in their right mind would own too many US dollars. With this said, what the Fed announced today is exactly what last week’s WSJ article hinted they would do so today is just affirmation and we’ve rallied in anticipation so from a risk reward standpoint in the very short term, stocks may be a sell on the news.