September 21 FOMC Statement

The Fed just finished it's FOMC meeting and has released it's press release .

In it, the Fed essentially confirms that the economy is in horrible shape and also that those at the Fed have no idea what they're doing. The release explains that growth is slow and unemployment remains high. The FOMC expects there will be some faster growth soon but that the unemployment rate will remain elevated for a long time; but the Fed leaves open the possibility that the economy does even worse, citing "SIGNIFICANT downside risks to the economic outlook" (emphasis added). This is a key phrase. It is the first time during this depression (from what I'm aware) that the Fed uses the word significant in front of downside risks.

The Fed also believes that inflation has subdued since the run-up in energy and commodity prices this summer.

I can tell you, inflation is here. Food prices in the store remain noticeably higher than they were one year ago. In addition, portions have shrunk. Cranberry sauce used to be a 16oz can, now it's a 14 oz can. Candy bars have continued to increase in price. This is not made up, this is economic reality.

So the Fed is choosing to convert $400 billion of their balance sheet from short term treasuries to long term treasuries (this is colloquially known as "Operation Twist," which was apparently tried in the 60s and failed) . They are hoping that this puts downward pressure on the long end of the yield curve which would encourage longer term investment. I think it will have very small effects in making it easier for those on the margins to invest or take out a mortgage. But in principle the whole process is making the underlying economy even worse.

It will further delay liquidation of bad debt and mal-investment - this overhang is probably the single most significant problem preventing this economy from growing sustainably.