Let's Twist Again: Goldman's Take
Goldman, which as recently as Monday night was pushing what clients it has left into believing the Fed may launch something as gargantuan as a $50-75 billion Flow-based QE program, has already come out with its take of today's action. For informative purposes, here it is.
From Jan Hatzius
BOTTOM LINE: Fed extends twist operation through year end; no change to “late 2014” funds rate guidance. Statement suggests downgrade to GDP and unemployment rate outlook.
1. The FOMC announced today that it will continue its Maturity Extension Program (MEP)—better known as the “twist”—through the end of the year. The operation will include sales and purchases of Treasury securities totaling $267bn, according to a statement from the New York Fed. The maturity composition of purchases will match the first phase of the MEP. The Fed will sell securities with remaining maturity of “approximately 3 years or less”; the statement from the New York Fed said that once the program is complete, the Fed will hold almost no securities maturating through January 2016 (thus the Fed effectively extended the window over which sales could occur). It will continue to reinvest MBS paydowns into the mortgage market.
2. The FOMC downgraded its views on the economy in its post-meeting statement. Although activity is still “expanding moderately”, they removed the phrase “labor market conditions have improved”. The statement also noted a downshift in consumption growth and the decline in headline inflation.
3. The description of the outlook suggested Fed officials now see slower growth and have a more pessimistic view on the labor market. Committee members expect growth to pick up “very gradually” (adding “very” to the previous language) and think the unemployment rate will decline “only slowly” (as opposed to “gradually”). Fed officials continue to see “significant downside risks” due to strains in global financial markets. The description of the outlook in the statement suggests lower GDP forecasts and higher unemployment rate forecasts in the Summary of Economic Projections (SEP), to be published at 14:00.
4. The committee retained the earlier language that the funds rate will remain “exceptionally low … at least through late 2014”. The fact that the guidance was not extended suggests the funds rate projections in the SEP may shift by only a small amount.
5. Finally, the committee put in place a more clear easing bias in the statement. The concluding sentence now says that the FOMC "is prepared to take further action", whereas previously the statement said that the committee would "regularly review the size and composition of its securities holdings". Fed officials also added that promoting a "sustained improvement in labor market conditions" could be justification for easing (in addition to promoting "a stronger economic recovery").
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