Translation: What the Fed said

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The Fed will do whatever it takes to get consumers and businesses to borrow and spend again. That’s the message of the Dec. 16, 2008, Fed policy statement — the most emphatic statement from the Fed in memory. The following is what the Fed said, and what it meant in plain English.

What the Fed said What the Fed meant
FED: The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent. Translation: The Fed’s rate-setting committee didn’t set a precise target for the federal funds rate. This time, the committee set a target range of 0 percent to 0.25 percent. Previously, the target rate had been 1 percent. But in reality, the federal funds rate had been below 0.25 percent since Dec. 4.
FED: 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. Translation: Unemployment is up. Consumer spending, business investment and factory output are down. It’s hard to get a loan unless you don’t need the money. And it looks like things are about to get worse.
FED: Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters. Translation: No one’s worried about inflation, at least in the near term.
FED: The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time. Translation: Normally, the Fed uses just one tool to influence monetary policy — adjusting the target for the federal funds rate. Think of that tool as a wrench: Turn it clockwise to tighten monetary policy, and turn it counterclockwise to loosen. The Fed has turned that wrench counterclockwise as far as it will go, and it will keep the federal funds rate at or near zero until economic conditions improve. But that wrench isn’t the Fed’s only tool. It has a toolbox full of screwdrivers, hammers and saws. And the Fed is going to use all of them. The Fed’s promise that it “will employ all available tools” is probably the most dramatic thing it has ever said in a rate policy statement. Imagine red lights flashing and klaxons blaring. Seriously.
FED: 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. Translation: The Fed isn’t going to worry about the federal funds rate for a while. The important thing is to flood the system with money to keep financial markets running and to encourage consumers and businesses to borrow and buy. It will print money to buy mortgage-backed securities, and maybe to buy Treasuries. Next year it will buy securities that back credit cards, student loans and auto loans, to encourage more lending in those areas. The Fed will do whatever it takes to stimulate lending and spending.
FED: Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Translation: This dramatic, emphatic policy statement is unanimous.
FED: In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent. Translation: The discount rate, which is what the Fed charges when it lends directly to banks, is cut three-quarters of a percentage point, to 0.5 percent. The rate that the Fed pays banks for excess reserve balances is slashed from 1 percent to 0.25 percent — another prod to banks to lend those excess reserves to businesses and consumers, and earn a better return.