Fisher Investments Editorial Staff
US Economy

One Step at a Time

By, 01/28/2010

Story Outline:

  • The FOMC's Wednesday meeting contained no surprises—the fed funds rate will remain at an accommodative 0-0.25% and no mention was made of the previously hinted new benchmark rate.
  • The FOMC also announced the winding down of numerous liquidity and support programs.
  • Overall, the Fed looks to remain accommodative for some time and any withdrawal of stimulus will be gradual—we expect to see much of the same globally. 


In a couple months' time, don't be surprised if you hear, "Hey, whatever happened to that ABCPMMMFLF?" 2010 dawned with many fearing a too-sudden exit from stimulus would rock a nascent recovery. Nothing doing, so far. The Federal Reserve seems content to be the tortoise. The Federal Open Market Committee (FOMC) met Wednesday to discuss the state of the economy—and though a lot was covered, the post-meeting statement contained no surprises. Absent was any mention of the previously hinted new benchmark rate. Instead, and as expected, the Fed funds target rate will stay at 0-0.25%—a sign the Fed is keeping its word to remain accommodative at least until the economic recovery is on surer footing.

Additionally, the Fed announced it's winding down several liquidity and support programs—suggesting the economy doesn't need quite so many training wheels. The Fed will stick to ending its $1.25 trillion mortgage-backed securities purchase program as planned, with all transactions to be completed by March 31. And numerous liquidity programs will terminate February 1, including the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (ABCPMMMFLF—who comes up with these?), the Commercial Paper Funding Facility, the Term Securities Lending Facility, and others. On top of all that, the Fed is also winding down its Term Auction Facility, with a final auction to be held on March 8th, and the Term Asset-Backed Securities Loan Facility is expected to end June 30th for loans backed by new-issue commercial mortgage-backed securities.

That may seem like a major move, but the sunsetting programs were short-term by design and will simply wrap up naturally, as planned. Additionally, the Fed isn't taking a hard line with end dates, saying it will modify plans if necessary to "continue supporting economic growth and financial stability." Even the end of federal underwriting of the mortgage market isn't truly an end. On Christmas Eve, the Treasury Department quietly lifted the cap on lending available to Fannie Mae and Freddie Mac, opening the door for them to buy an unlimited amount of mortgages and mortgage-backed securities—potentially injecting much more liquidity into the mortgage market. In effect, Fan and Fred could pick up where the Fed leaves off in buying mortgages. Whether this move is wise long-term is debatable, but it certainly allays fears mortgage rates will start ratcheting and liquidity suddenly dry up on this program's conclusion.

Overall globally, central banks seem to be taking a one-step-at-a-time approach, committing to staying accommodative for awhile yet. With inflation a risk, but one we still see as a long way down the road, it seems more tortoise and less hare, is what's called for at this time. Even if it makes for snooze-worthy Fed statements and horrendous acronyms.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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