The New Fed Policy: Better Than Nothing

The New Fed Policy: Better Than Nothing
By Bill Conerly,
Conerly Consulting
, Businomics

The Fed’s decision today was mildly good news in terms of

1. the Fed’s understanding of the sluggishness of the economy, and
2. the small change in policy.

For those of  you into original sources, here is the Fed’s statement

The economy is certainly growing, but not fast enough to make up much of the ground lost in the recession.  We are still at least six percentage points below our potential, so the risk of going overboard on monetary stimulus is slight. The good news: the Fed is starting to understand this.

The second good news is that the Fed will stop allowing their credit to the public to contract.  Background: the Fed bought a ton of mortgage-backed securities to help that market, and the portfolio is slowly running off.  The change: the Fed will take the income and payoffs from that portfolio and use it to buy new Treasury securities, so their total impact on the economy will be unchanged.  You can see how the run-off was contracting their total credit:

Yes, you have to look closely to see the run-off.  In other words, this is a very, very minor adjustment.

It’s a move in the right direction, but nearly enough to get this malaise over.