After slashing the Federal Funds Target Rate to an all-time low at its last meeting in December, the FOMC is regarded as having exhausted its most tried-and-tested means of stimulating the flagging US economy and encouraging financial institutions to resume lending to both commercial and individual borrowers.
The committee said that, since it last met, data suggests that the US economy has weakened further, with industrial production, housing starts and employment rates continuing to decline steeply, and drops in domestic spending and global demand. The FOMC "anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time".
With no further capacity to cut rates, the Federal Reserve will "employ all available tools to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level", the FOMC said in a statement.
Such measures to revive the economy at the expense of expanding the Fed's balance sheet have been termed "quantitative easing" by some analysts, the policy of using the resources of central banks to stimulate ailing markets directly, an approach that proved to be of mixed effectiveness in combating the economic slump in Japan during the first half of this decade.
"The Federal Reserve continues to 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 the quantity of such purchases and the duration of the purchase program as conditions warrant," the FOMC stated.
Furthermore, the Committee said it would purchase Treasury securities if it thought it would improve conditions in private credit markets, while the Fed will push ahead with implementing the Term Asset-Backed Securities Loan Facility to extend credit to small businesses and individuals.
The first meeting of the FOMC under the Obama administration also saw the participation of William Dudley, a newcomer to the committee following his appointment as president of the Federal Reserve Bank of New York, following the Senate confirmation of his predecessor Timothy Geithner as US Treasury secretary.
Yesterday also saw the appointment of Daniel Tarullo as a member of the board of governors of the Federal Reserve. Following his Senate confirmation on January 27, Tarullo was nominated to an unexpired term ending in January 2022.
The week on Risk.net,October 14-20, 2016Receive this by email