September 25th, 2009 by Prieur du Plessis, Investment Postcards from Cape Town

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This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The tone of the policy statement and details are largely close to expectations. The federal funds rate was left unchanged at 0%-0.25%. The statement reiterates Chairman Bernanke’s opinion that an economic recovery is underway, representing a significant departure from the August policy statement which noted that “economic activity is leveling out.” The outlook for inflation remains favorable in the Fed’s opinion due to “substantial slack” in the economy. In addition, the stability of longer-term inflation expectations was cited to rule out the case of an inflationary threat.

The last paragraph of the Fed policy statement is devoted to the outlook of monetary policy. The Fed left the stance unchanged to read as follows: “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” The translation here is that Fed is on hold for several months.

The plan to buy mortgage-backed securities of $1.25 trillion is extended to the first quarter of 2010 from the end of 2009. The target amount has not been changed; to date, the Fed has bought two-thirds of the planned amount. The Fed’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. To date, the Fed has purchased 94% of the target.

In the effort to make Fed communication transparent and accessible, I humbly request that this long-winded sentence, which has appeared in the April, June, August, and September statements, be more succinct next time around:

“Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.”

Source: Asha Bangalore, Northern Trust Daily, September 23, 2009.

* Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.

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