With expectations running high for the Fed to do something or say something to acknowledge that things are not exactly going according to plan, Ben Bernanke’s Fed appears to have delivered today.

As expected, the FOMC left rates unchanged at 0.0% - 0.25%. The key phrase referring to leaving rates unchanged for an “extended period” was left intact.

However, this time around, there were significant changes to the Fed’s statement. The Fed says

• The pace of growth is likely to be more modest than anticipated
  
• The pace of recovery in output and employment has slowed in recent months
  
• Output has slowed
  
• FOMC will keep its level of asset holdings constant
  
• Household spending is increasing gradually, though remains constrained due to jobs market, asset declines, tight credit, etc.
  
• Business spending on equipment and software is rising, though investment in non-residential structures remains weak. Employers are also reluctant to add to payrolls.
  
• Bank lending continues to contract, and housing starts remain at depressed levels.
  
• Inflation is likely to be restrained for some time due to low cost pressures and stable longer-term expectations.
  
• FOMC will reinvest proceeds from maturing mortgage securities into U.S. Treasury. This means that the current MBS will eventually be converted to Treasury Bonds
  
• Once again, Thomas Hoenig was the lone dissenter.

The key is the market appears to have gotten most of what it wanted. The Fed recognized the weakness and committed to continue to buy treasuries over time (via the reinvesting of proceeds from maturing bonds). While there was speculation that the Fed would reinvest its mortgage proceeds, many believed that it would buy mortgage debt rather than government bonds.

Top Fed officials argue that more can still be done to curb renewed economic weakness, should such action become necessary. Some suggest that reinvesting proceeds from maturing mortgage bonds back into the market would be an effective policy, while others are in favor of lowering the rate at which the Fed pays banks to store their excess reserves (already at a record low of 0.25%).

The goal remains to prevent deflationary circumstances in which the economy experiences falling prices and depressed consumption.

Upon further reflection, today's action appears to be a compromise amongst FOMC members. In the June statement the committee said that it would provide further stimulus should the outlook "worsen appreciably." Today, the Fed characterized the economic conditions as "more modest" growth, which would seem to be a fry cry from "worsen appreciably." Therefore, it appears that certain members of the FOMC may be getting a little anxious.

In a separate statement, the NY Fed said it will keep the System Open Market Account (i.e. the Fed's balance sheet) at around $2.054 trillion. It also said that the Treasury bond purchases will be focused on the 2-year to 10-year part of the Treasury curve.

The stock market's close of -55 points, coupled with the 10-year yield moving to a new cycle-low of 2.78% seems to suggest that traders in both markets remain a bit concerned about the outlook for the economy.

  S&P 500 - Intraday

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