THE BASIS POINT

BUILD YOUR OWN FED STATEMENT! (10/24/12 Edition)

Parsing the Fed is everyone’s favorite game, so as the Fed wraps its second to last meeting of 2012, my friend and industry colleague Ted Rood invites you to play “Build Your Own Fed Statement!” Just choose your favorite answers from the Ted Statement below.

Stay tuned for rate market reaction to tomorrow’s actual statement.

And here’s what happened to rates since QE3 was announced in the last Fed statement.
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BUILD YOUR OWN FED STATEMENT!

It’s easy to win: just choose the most appropriate phrases.

Information received since the Federal Open Market Committee met in September suggests that (economic activity; NFL player fines and suspensions; loan originator incomes) have continued to expand at a moderate pace in recent months. (Growth in employment; loan approval times at major banks; the St Louis Cardinals’ offensive prowess) has been slow, and the (unemployment rate; hostility at presidential debates; mortality rate for Monster energy drink consumers) remains elevated. Household spending has continued to advance, but (interest in Honey Boo Boo; ARod’s dugout flirting; Lance Armstrong’s endorsement opportunities) appear to have slowed. The housing sector has shown some further signs of improvement, (so we’re now obviously in a housing boom; commonly referred to as a dead cat bounce; albeit from a depressed level). Inflation has been subdued, although the prices of (Monster competitor Red Bull; Giants’ World Series tickets; guns and ammunition) have increased recently. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster (misguided public faith in the Committee; income stability among Committee members; maximum employment and price stability). The Committee is concerned that, without further policy accommodation, (economic growth; iPad Mini enthusiasm; Yahoo’s prospects even under Mayer) might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, (Spain’s midday nap habit; lack of guardrails along the U.S. fiscal highway; Detroit’s presence in the World Series) continues to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

To support a (stronger economic recovery; pause in Yankee fan tear flow; killer bond trader bonus season) and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional (agency mortgage-backed securities; single malt scotch; favor with banks who hire former Committee members) at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to (extend the average maturity of its holdings of securities; observe Casual Fridays; order a cocktail with lunch daily) as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities (by about $85 billion; faster than the Federal deficit; to the level of Yankees’ payroll) each month through the end of the year, should put downward pressure on longer-term interest rates, support (mortgage markets; Wells Fargo market share; ceaseless taxpayer burden) and help to make broader financial conditions more accommodative.

The Committee will closely monitor (incoming information on economic and financial developments; Candy Crowley’s future Cabinet prospects; candid Scarlett Johansson photos) in coming months. If the outlook for (the labor market; our fantasy football team; our ability to work at Wells Fargo someday soon) does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the (likely efficacy and costs of such purchases; shitstorm Bernanke’s successor will reap; potential to shut Ron Paul up for once).

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate (for a considerable time; until the Committee pays off its home equity loans; until Bernanke quits in January) after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.