Download Economists React: `Who Could Ask for Anything More?`

December 16, 2008, 3:52 pm
Economists React: ‘Who Could Ask for Anything
More?’
Economists and others weigh in on the Fed’s decision to cut interest rates to historic
lows and signal a shift in the way it conducts monetary policy.
 Today’s FOMC statement will go down in the annals of Fed history along with
Paul Volcker’s Saturday announcement going to reserve targeting in 1979. Volcker’s
press conference was called the “Saturday Night Massacre.” I nominate this one to be
called the “Who Could Ask for Anything More?” statement. The Fed is throwing
everything in its arsenal at the economic/financial situation. –Stephen Stanley, RBS
Greenwich Capital
 The core was restrained The FOMC statement was more aggressive than
anticipated, indicating that policymakers “will employ all available tools to promote the
resumption of sustainable economic growth and to preserve price stability.” The vote
was unanimous. In our view, here are the three most surprising aspects of the statement:
1) The official target rate was reduced all the way to 0.0% to 0.25% (let’s call it
0.125%)… 2) A conditional commitment to keep the policy rate low “for some time.”
… 3) An indication that the Fed is considering the purchase of long-term Treasuries.” –
David Greenlaw, Morgan Stanley
 In practical terms, the decision to slash the target rate will do almost nothing to
boost economic activity. However, it does send a strong message to the markets that the
Fed means business, particularly when combined with the commitment to leave rates at
near zero for some time. With official interest rates now as close to zero as they are
going to get, the Fed’s focus has already switched to quantitative easing. –Paul
Ashworth, Capital Economics
 So here we are: Rock bottom. We take no satisfaction from the vindication of our
view that one basis point is the right rate for the U.S; it is a reflection of an utterly
desolate economic picture, which will persist for the foreseeable future as the wrenching
adjustment in household finances continues… The Fed’s objective now is to “employ
all available tools” to fix the economy… If zero rates don’t work, they will try anything;
good. But this is a terrible, chastening day. –Ian Shepherdson, High Frequency
Economics
 Assuming that fed funds will not trade below 0%, there will be no interest rate
constraint on accelerating the pace of the Fed’s balance sheet expansion. Rather, the
0.25% upper end of the target range will be serve as a ceiling, proximity to which will
signal that more aggressive liquidity infusions are warranted. –Alan Levenson, T. Rowe
Price
 The action taken today and the quantitative easing moves to come speak volumes
about just how petrified policymakers are that the economy is in danger of sliding into a
deflationary spiral that would be disastrous considering the highly leveraged condition
of the economy. Monetary policy is going to do whatever it can to try to avoid this
outcome, and further substantial fiscal stimulus is also in the works. –Joshua Shapiro,
MFR Inc.
 The Federal Reserve wants to stabilize the financial system and prevent the
economy from a deeper and protracted recession. It also is trying to make sure that the
probability of a debilitating deflation is very low. However, this type of unconventional
monetary stimulus has risks. Even though inflation is in remission for now, there is a
meaningful risk of an inflation bubble later, especially if the central bank is successful
in stimulating the economy. For now, Helicopter Ben has to put out the big fire and
worry about the inflation bubble later. –Sung Won Sohn, Smith School of Business and
Economics
 The Fed has signaled that it is formally switching to a quantitative easing strategy
that will further increase the size of its balance sheet. The Fed suggested that it would
potentially up-size its purchases of GSE debt (currently set at $100 billion) and Agency
MBS (currently set at $500 billion) and that it will roll out the Term Asset-Backed
Securities Loan Facility in early 2009. The Fed also said that it is weighing the benefits
of purchasing long-dated Treasuries—though we judge this step is still an unlikely one
for the Fed to take (since it is trying to narrow the spread between MBS and Treasuries).
Support for economic growth needs to come from fiscal policy at this point and we
expect passage of a massive stimulus package in the first quarter of 2009. –RDQ
Economics
Compiled by Phil Izzo