Federal Reserve Begins First Meeting of 2009 with No Flexibility

The Fed is beginning the first meeting of 2009 and of the Obama Administration with absolutely no flexibility in setting the Fed Funds rate or articulating Federal Reserve policy.

The Federal Reserve has absolutely no flexibility in what it can and cannot do tomorrow, January 28.

The result of its two day meeting, begin today, is entirely predetermined by circumstance.

It cannot change the Federal Reserve rate from the target rate that it set in its December meeting of zero to 25 basis points.  There obviously is no flexibility to lower the rates further, and since raising rates right now would undo any progress that is being made to opening credit markets, that outcome isn't really available either.

Many observers have suggested that the Fed would announce that it is going to make open market purchases on the long end of yield curve (out more than 10 years).  However, with the 10 year bond already yielding only 2.60%, such a move would artificially upset the bid-ask along the Treasury yield curve,  removing the natural bidders for an extended period.   It would therefore be a terribly unwise move for the Fed to make when Treasury is going to need to go out and sell tremendous amounts of debt to fund TARP and Obama's initiative.  It would also lead to a dramatic fall in the dollar which would further damper demand for USD denominated paper.  They are too bright for this.

Expect nothing tomorrow.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to bank transparency and the climate crisis. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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