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The Fed Stays Fluid

The Fed issued a long statement that clearly indicated their policies would be fluid. There was a little bit for everyone in the statement who wanted an aggressive Fed, and some for those who wanted a more conservative Fed.

First, they reminded us rates would stay "exceptionally low...for some time."

Fed opens door to buying Treasuries. The Fed needs to make sure that Treasury yields remain low. To buy some insurance, many traders wanted the Fed to announce they would be buying Treasuries, and while it didn't happen Mr. Lacker dissented, indicating he did want to buy Treasuries.

The Fed wants to make sure that higher borrowing costs don't crowd out private sector access to credit, and while this would be a fairly radical step for the Fed they did open the door a bit more by saying they were "prepared" to purchase longer-term Treasuries (at the prior meeting, they said they were merely "evaluating" the benefits).

Why does the Fed want to keep rates low?

Aside from the inflation concerns, remember they are aggressively buying mortgage backed securities. That investment could be in trouble if longer term interest rates head higher.

More buying of mortgages?

Speaking of buying mortgages, stock traders believe that the Fed program to purchase agencies and mortgage-backed securities has been a major factor in lowering mortgage rates, so they welcomed the Fed's statement that they "stand ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant."

TALF coming, but no expansion indicated. The Fed's upcoming $200 billion Term Asset-Backed Securities Loan Facility (TALF) will lend money to purchasers of asset-backed securities, money that will funnel through to consumers via credit card loans, car loans and leases, student loans, and small business loans. There was some discussion that the Fed could expand the program to include other areas of lending, including commercial mortgages, but they passed on this opportunity.

All in all, this was a long, fluid statement, indicating the Fed would change programs as conditions warrant. While this creates uncertainty about the size and extent of future programs, the Fed obviously feels this is the only safe course.

They are clearly taking a page from Keynes’ famous dictum, "When the facts change, I change my opinion. What, sir, do you do?"

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