Balancing Act

The Federal Open Market Committee just released its policy statement. No major surprises here. The Federal Funds Rate is staying in its 0 to .25 range. For some time I’ve been using the compare function of MS Word to track the changes in the FOMC’s statements. The function which is meant to find revisions in updated versions of the same document works surprisingly well for the FOMC. In other words, there are not a whole lot of changes between statements. The minimalist approach means that I’m going to each change got Joyciean attention (James Joyce was rumored to have ceased writing for days simply to fixate on one word that he wanted to get right).

So here are this month’s changes. The Fed is
1. Shifting the winding down of the MBS purchases into the present tense.
2. Says firms are “reluctant to hire” rather than the active cut backs from last month.
3. Eliminates the phrase “the fed is monitoring the size and composition of its balance sheet”
4. Has reaffirmed its commitment to end most of its special programs by February 1, 2010.

I’m still watching the balance sheet, given that, as the chart above shows it’s still double the size that it was before the crisis began. Additionally, it's the red section of the chart, direct asset, purchases that is growing and likely carries the most risk. Just as Treasury has called the Capital Purchase Program closed even while sitting on nearly $100 billion of potentially toxic assets, the Fed may be stuck with a good deal of garbage for a long time.

California follows national trend

In a recent article, I warned that national leaders should look at the problems facing California as a harbinger for the national debt outlook. California paid out almost $2 billion in IOUs since beginning the new fiscal year without an operating budget in July. While the IOUs, officially warrants, were set to mature at latest on October 2nd, California has announced that it will end warrant issuance on September 4th and begin repaying them. The move comes as Gov. Schwarzenegger signed a budget that should eliminate the projected fiscal shortfall in FY2010.

The improving credit conditions are not unlike those at the national level. In its statements this week the Federal Reserve’s governing body, the FOMC, announced that it would end its $300 billion Treasury purchase program one month later than expected. The move will spread out the remaining purchases, of less than $50 billion, over a longer period, and wane the economy of Fed purchases. Other Fed programs aimed at private firms, such as the commercial paper program, have already seen stymied outflows as firms find better borrowing rates in the market.

Yet in neither Sacramento nor the Fed have debt issues been resolved. California is taking a loan to pay its IOUS. The Fed’s balance sheet remains double the size that it was at the beginning of 2008.

California follows national trend

In a recent article, I warned that national leaders should look at the problems facing California as a harbinger for the national debt outlook. California paid out almost $2 billion in IOUs since beginning the new fiscal year without an operating budget in July. While the IOUs, officially warrants, were set to mature at latest on October 2nd, California has announced that it will end warrant issuance on September 4th and begin repaying them. The move comes as Gov. Schwarzenegger signed a budget that should eliminate the projected fiscal shortfall in FY2010.

The improving credit conditions are not unlike those at the national level. In its statements this week the Federal Reserve’s governing body, the FOMC, announced that it would end its $300 billion Treasury purchase program one month later than expected. The move will spread out the remaining purchases, of less than $50 billion, over a longer period, and wane the economy of Fed purchases. Other Fed programs aimed at private firms, such as the commercial paper program, have already seen stymied outflows as firms find better borrowing rates in the market.

Yet in neither Sacramento nor the Fed have debt issues been resolved. California is taking a loan to pay its IOUS. The Fed’s balance sheet remains double the size that it was at the beginning of 2008.