Wednesday, March 18, 2009

Fed Funds Rate Unchanged

At about 12:15 pm EST today, the Federal Open Market Committee (FOMC) - more commonly known as "the Fed" - left short term interest rates unchanged. The "fed funds rate" is the rate banks charge each other for overnight and short term loans. The rate currently sits at 0% to 0.25%.

In typical confusing Fed-speak, the press release accompanying the statement said:

"Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth."

Loosely translated into everyday English, that means "things are bad now but will get better in the near future."

Short term rates can't get much lower. They're already effectively at zero, so the Fed can't get any mileage out of tweaking these. Instead, the Fed announced two actions designed to help shore up the credit markets.

The Fed will also purchase up to an additional $750 billion of agency mortgage-backed securities and purchase up to $300 billion of longer-term Treasury securities over the next six months.

Bad debt in the form of mortgage backed securities is at the center of the storm battering the credit markets. The Fed's goal in buying more of this bad debt is to mop up more of the blood in the streets, resulting in looser lending standards. The Fed's action today brings its total purchases of these securities to up to $1.25 trillion this year.

The Fed's statement said they were buying longer-term Treasury securities in order to help improve conditions in private credit markets. I don't really pretend to understand exactly how buying Tbills would help the credit markets. The FOMC press release says their goal is to "facilitate the extension of credit to households and small businesses" and that sounds good to me. Credit is the engine of the modern American economy, so I say go Fed.

Economists, sadists, wordsmiths and insomniacs can read the FOMC press release here.