Tuesday, December 16, 2008

The Fed's New Strategy: The Kitchen Sink Interest Rate Policy

The Fed announced their policy of establishing "a target range for the federal funds rate of 0 to 1/4 percent."

This brings two points to mind:

1.) The Fed has no interest rate moves left. This is it.

2.) The Fed is terrified about the economy. And they have good reason:

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Let's look at the charts:


Employment has taken a nosedive. As a result:


People have cut way back on their spending. As a result:


Industrial production is dropping and so is:


Capacity Utilization -- the amount we are using of our manufacturing capacity.

More to the point, the Fed will step up their other activities:

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

To the point: the Fed is scared right now. I mean really scared. And they will do anything even remotely possible right now.