In addition to the continued reinvestment of the maturing MBS into US Treasuries, the FOMC decided to buy another $600b of longer term notes by June 2011, $75b per month. Right now this is the plan but they will revaluate at every meeting. The next one is on Dec 14th. Hoenig dissented saying “the risks of additional securities purchases outweighed the benefits.” To give them license to print in their minds, the Fed believes the recovery continues to be slow and high unemployment is keeping the recovery restrained and they continue to believe that “measures of underlying inflation are somewhat low” as the progress towards higher levels of resource utilization has been “disappointingly slow.” This benign outlook on inflation is in the face of a 9% gain in the CRB index, a 5.5% fall in the $ index and a 60% gain in 5y5y inflation expectations since the Sept meeting. Bottom line, all in line with expectations.
Because the Fed has reached a point where the economy is not responding to historically low interest rates because in a time of deleveraging it doesn’t matter what the cost of money is, asset price manipulation is their only weapon left. If the true goal of the Fed now is to juice asset prices in order to generate a wealth effect that would in turn lead to higher consumer spending and investment spending, it just follows the Greenspan mantra and market put belief. There used to be a time though when asset prices reflected the underlying fundamentals rather than having manipulated asset prices impact economic activity. The former was historically a much healthier foundation for growth rather than the latter.