The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

54:38
with John J. Mack
on Monday, February 23, 2009

Good Evening: Most U.S. markets reversed their recent trends today, as 2009′s laggards became leaders and vice versa. Equity short sellers finally ran into a rally that didn’t fail, commodities actually advanced, and gold was tarnished. The proximate cause came in the form of Fed Chairman Bernanke’s testimony before the Senate. His remarks may indicate that a wholesale nationalization of the U.S. banking system isn’t in the cards for now, so investors flocked back into financial stocks. Whether this nascent return of risk appetites has any staying power may depend in part of what President Obama says tonight, but while knowing what our government doesn’t want to do is somewhat helpful, investors will likely refuse to commit capital in any serious way until they know what our government will do.

Neither the news overnight nor the economic releases this morning had any bullish portents in them. JP Morgan’s decision to slash its dividend, along with further retreats in bourses overseas elicited little more than a yawn from stock index futures traders. Likewise the horrendous drop in both the Case-Shiller home price index (- 18.5% yoy) and consumer confidence (25 vs an expected 35 — see below) were mostly ignored. Given that the major U.S. averages have been under pressure almost all year and looked ready to drop off the page yesterday, the 1% rally at this morning’s open looked very much out of place. Even when the shorts smacked this initial pop back to unchanged, the S&P never buckled and never did breach its November 21 low of just below the 740 mark.

The rally that followed was almost as tepid as Chairman Bernanke’s written testimony before the Senate (for BAC-MER’s take, see below), but it did manage to set a new high just before lunchtime. At some point, however, Mr. Bernanke was asked to provide some details about the concept of “stress testing” banks and whether such a test would simply provide political cover for a large scale nationalization of financial institutions. “I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn’t necessary,” Bernanke said at the Senate Banking Committee hearing (source: Bloomberg article below). His response seemed to ease investor fears and stocks never did revisit their lows.

As the day progressed, stocks went from strength to strength before closing near their highs for the session. Some market participants pointed to Robert Prechter’s “cover your shorts” call this morning as one of the precipitating events, but Mr. Prechter holds far less sway over the markets today than he did two decades ago (see below). Perhaps our Fed Chairman’s testimony helped, as did the prospects for a presidential bombshell tonight, but whatever the reason, the major averages almost exactly reversed yesterday’s steep losses. The gains ranged from the Dow’s 3.3% to a 4.75% rise in the Dow Transport index. Treasurys mostly shrugged off the comeback in equities and a so-so two year note auction to finish mixed. Yields rose 4 to 7 bps in the short and middle sectors of the coupon curve, while the yield on the long bond actually fell a basis point. The dollar was off a bit and commodities followed stocks higher. Though precious metals and their associated equities were abandoned, oil and the rest of the CRB components rose enough to allow the index itself to post a gain of 1.75%.

To Nationalize or Not to Nationalize — is this the question we should continue debating? Judging by the sell off in bank stocks when the trial balloon of nationalization was floated above the corner of Wall and Broad streets, as well as the lift off in those same financial shares when Chairman Bernanke seemed less than enthusiastic about doing so, Mr. Market seems to be taking sides. Rather than tackle this issue on my own, I refer everyone to the points and counter-points made in print today by former FDIC Chairman, William Isaac, and Fusion IQ’s Barry Ritholtz (see below). Mr. Isaac is against the type of nationalization he oversaw during the unwind of Continental Illinois Bank, while Mr. Ritholtz points out that Citibank, Bank of America (now the owner of the former Continental Illinois) and the troubles that face them are nothing like what helped give birth to the “too big to fail” doctrine a quarter century ago.

What separates these arguments has more to do with semantics than it does philosophy. We all acknowledge doing nothing is not an option. We all know, in the wake of Lehman Brothers, that straight liquidation of our troubled banks would suffocate a financial system already gasping for air. We all know allowing the U.S. government to fully own and operate our nation’s banks is, to put it kindly, short-sighted and suboptimal. And we all know government will have to play at least some role; Uncle Sam in fact already owns stakes in many financial institutions. The real debate here turns on just what government should do next — and how we get there from here. As we wait for the Obama Administration to make up its mind and choose a course of action — soon, please! — I would hope we all start to realize we’re all in this together.

Via the TARP and other programs, taxpayers are going to shoulder some of this burden, but I hope we don’t do so alone. Shared sacrifice seems to be called for here if depositors are to retain what’s left of their confidence in our fractional reserve banking system. Equity holders, preferred, trust preferred, and convertible preferred owners, as well as junior debt holders should probably be prepared to take haircuts of some sort. They do, after all, own securities that are junior in the capital structure and are supposed to entail some risk (the details of which are listed in the various prospectuses many investors never bothered to read). Shared sacrifice of some sort will also allow the millions of nonfinancial types in our society to feel less like the chumps they believe they’ve been played for thus far. I hope President Obama takes the opportunity to address these issues tonight because all this debate itself creates a corrosive form of uncertainty that benefits none of the constituents mentioned above. When asked whether our government can play a reluctant but constructive short term role in our financial system, I hope that in addition to his usual, “yes, we can”, he also offers “and here’s what we propose to do about it…”

– Jack McHugh

U.S. Stocks Gain Most in Month as Citigroup, Bank Shares Surge

U.S. Economy: Consumer Confidence, Home Prices Slump

U.S. to Get Bank Ownership Stakes Only as Losses Rise

Prechter Advises ‘Closing Shorts’ on U.S. Stocks

Bank Nationalization Isn’t the Answer

Citi and BofA Ain’t No Continental Illinois Bank

Bernanke blues.pdf

I am amazed at the general tenor of comments about today’s rally — it was very much party like its 1999.

I was on Liz Claman‘s show today from 3 -4 (she’s a delight). It felt like a celebration to me — and all we did was undo yesterday’s losses. It was treated like the second coming by some people.

Put this into context: The action of this Bear has ripped away half of the bull market from 1982 to 2007. Thats 27 years of gains down the tubes.

And today’s action took back a single day of losses.

The chatter makes we wonder if there is simply far too much bullushness for anything more than a modest bounce at this time . . .

Implode-o-Meter:

STOP “FHA Subprime” and Downpayment Money Laundering -
STOP H.R. 600!!! (formerly H.R. 6694)
A Blatant & Unconscionable Abuse of the Taxpayer & Cause of More Foreclosures

This practice has been criticized or ruled against by the FHA, the GAO, the IRS, the FBI, and even US Congress itself, which outlawed it (for the time being) in the 2008 Housing Bill. Yet those who profit off the practice are trying to revive it.

So What is it??

The contentious practice is called “seller-funded downpayment assistance” (SFDPA). It is used to allow home buyers getting Federally-backed mortgages to bypass the need for a downpayment, supposedly for charitable reasons.

On the surface, it sounds benign, but it is actually fraud and money laundering inflicted on the Federal Housing Administration (that is, taxpayers), the housing market in general, and in a sense, even the buyers!

One of these companies, Global Direct Sales (which runs the “Grant America Program”) has sued us in an attempt to stop us from revealing the existence of SFDPA and discussing it frankly. SO FAR A FEDERAL JUDGE HAS BLOCKED THEIR ATTEMPTS TO SILENCE US. (Read More about our battle here. Help us to fight this NUISANCE lawsuit which is a blatant attack on free speech!)

How SFDPA works:

Someone wants badly to sell a home. FHA has subsidized programs to help home buyers. The “problem” is that even with FHA’s programs, a 3.5% down payment is still required (to show committment on the part of the buyer). Sellers realize if they could cut the downpayment to zero, they can make home buyers out of virtually anyone, and hence unload homes easier. Intermediaries like Realtors, as well as home builders, realize this would have the potential to increase their sales and transactions. Even some in Congress are in on the scheme, as they can appear to provide constituents with “free homes”. After all, home ownership is a right, isn’t it??

Enter SFDPA.

Third party, private companies have established programs that allow sellers to cover the downpayment FOR the borrowers, by promising to repay the money after the sale. While initially the downpayment is covered by the SFDPA company, the seller’s money is then channeled through one or more entities which have a nonprofit or otherwise “exempt” status (like an Indian tribe) to repay them. The buyer has already presented the LENT money to the FHA as if it were their own, covering the required downpayment. Effectively, the seller has paid the buyer’s downpayment, with the FHA being none the wiser.

The FHA has no reliable way of knowing which loans were made this way.

The GAO has found that transactions using SFDPA usually have been marked up by about 3%… in other words, USUALLY THE SFDPA DOWNPAYMENT MONEY COMES FROM SIMPLY MARKING UP THE HOME VALUE!!!

Why is this bad? Well,

• it distorts home prices, and creates an incentive to keep exaggerating prices upwards endlessly
• it means ALL the money for the purchase actually comes from the FHA (taxpayers), as it is rolled into the loan principle (in other words, the FHA nets NOTHING of real value)
• since the markup in value is not “real”, it means the buyer immediately has a zero or negative equity position, relative to true market prices

This is bad all around — for everyone, that is, except the seller and the intermediaries INCLUDING THE SFDPA COMPANIES, WHO MAKE HUNDREDS OF DOLLARS IN “FEES” OFF EACH TRANSACTION. These companies have netted millions off of SFDPA, given the popularity of the programs with builders and Realtors (in other words, those who want to see homes sell, no matter what).

So why in the world is there a bill to get this practice started again? PERHAPS BECAUSE ITS CONGRESSIONAL SPONSORS LIKE THE DONATIONS THE SFDPA COMPANIES, REALTORS, AND BUILDERS KEEP SENDING IN, to help insure this particular loophole is kept open, and other “housing-friendly” giveaway legislation is put forth. The main sponsors are:

• Al Green (D-TX)
• Maxine Waters (D-CA)
• Gary Miller (R-CA)

Does SFDPA Actually Help Homebuyers?

Some argue that SFDPA should be allowed because it helps people get into homes. But this makes no sense:

• If no-money-down loans were a good idea, why wouldn’t the FHA just provide 100% financing itself, and cut out the middle-men? [In fact, the FHA has tried and been blocked in the past... by the SFDPA companies!]
• If the loans were actually charitable, wouldn’t the money come from charities, instead of the home sellers? [The IRS agrees. Sellers contractually COMMIT to "donate" the money to cover the buyers' downpayment]
• Think about what is going to happen to these loans in a market of falling prices, with greater job loss, forcing more people to sell & move [All of the performance statistics for these loans, as disturbing as they were, were from good times!]
• Haven’t we learned as a society that loans with “no skin in the game” are inherently unsound and a bad idea, as they simply lead to foreclosures? [Some people apparently havent -- or they don't care!]

Why Did The Bill Number Change?

The original SFDPA-resurrection bill, H.R. 6694, specifically instituted fees to attempt to cover the risk of SFDPA lending. However:

• The fees were essentially subprime “risk premiums,” increasing as FICO scores went down. But these practices have already been reviled and discredited!
• Proponents argued that the FHA would “make money” on the program because of the risk premiums, but neglected to point out that the fees would be simply refunded after a history of on-time payments.
• If the loans went into default, the FHA would likely lose money. Since home values start off inflated, it is unlikely the “risk premiums” would cover losses (and FHA is already operating at a loss for the first time in its 7-decade history).

The end result: SFDPA borrowers would be treated just like subprime borrowers, and the FHA (taxpayers) would still likely lose lots of money overall.

HR 600 simply omits the risk-based premium regime, leaving it to be instituted by FHA rules after the law passes. We believe this is simply a tactic to deflect criticism — especially of the use of FICO scores — not to actually change the nature of the SFDPA law.

The law is substantially the same — the renewed SFDPA would provide no-money-down, subprime-like loans, at great peril to the FHA and taxpayer. It would continue to inflate home values, and likely lead a great many home buyers into foreclosure.

IT MUST BE STOPPED.

How you can help:

• Write to and call the bill sponsors expressing your opinion, and to your congressmen to get them to apply pressure to stop the bill.
• Donate to us in our legal fight to keep our free speech on this subject, and defend the pocketbooks of all taxpayers.
• Spread the word — put STOP “FHA SUBPRIME” buttons on your web page, and link to this page.

More Campaign Banners:

250×250 black — Copy/paste <a href=”http://ml-implode.com/sfdpacampaign.html”><img src=”http://s3.amazonaws.com/iehi-img-mli/250x250stopsfdpabk.png” alt=”STOP HR 600: STOP ‘FHA Subprime!’” /></a>

250×250 white — Copy/paste

Why Tax Rebates make no sense whatsoever:

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via Across the Street

I love this quote:

The Lennon-McCartney of economics bloggers, Calculated Risk and The Big Picture, each bring pithy, cut-to-the-chase commentary to bear on the details of the housing plan that have come to light.

-Housing Crisis.com

I just want to know who’s John and who’s Paul . . .

Here is something to mull over: Technically, 7,470 in the DJIA is the 50% retracement of the entire bull market that began in August 1982.

At 7,100, we not only cut in half the October 2007 highs of 14,198.50, but we have given back 50% of the 27 year move from the start of the big bull market of the 1980s to yesterday.

That is astounding . . .

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Dow Industrials 1982 – 2009

Chairman Ben S. Bernanke
Semiannual Monetary Policy Report to the Congress
Before the Committee on Banking, Housing and Urban Affairs, U.S. Senate, Washington, D.C.
February 24, 2009

~~~

Chairman Dodd, Senator Shelby, and members of the Committee, I appreciate the opportunity to discuss monetary policy and the economic situation and to present the Federal Reserve’s Monetary Policy Report to the Congress.

Recent Economic and Financial Developments and the Policy Responses
As you are aware, the U.S. economy is undergoing a severe contraction.  Employment has fallen steeply since last autumn, and the unemployment rate has moved up to 7.6 percent.  The deteriorating job market, considerable losses of equity and housing wealth, and tight lending conditions have weighed down consumer sentiment and spending.  In addition, businesses have cut back capital outlays in response to the softening outlook for sales as well as the difficulty of obtaining credit.  In contrast to the first half of last year, when robust foreign demand for U.S. goods and services provided some offset to weakness in domestic spending, exports slumped in the second half as our major trading partners fell into recession and some measures of global growth turned negative for the first time in more than 25 years.  In all, U.S. real gross domestic product (GDP) declined slightly in the third quarter of 2008, and that decline steepened considerably in the fourth quarter.  The sharp contraction in economic activity appears to have continued into the first quarter of 2009.

The substantial declines in the prices of energy and other commodities last year and the growing margin of economic slack have contributed to a substantial lessening of inflation pressures.  Indeed, overall consumer price inflation measured on a 12-month basis was close to zero last month.  Core inflation, which excludes the direct effects of food and energy prices, also has declined significantly.

The principal cause of the economic slowdown was the collapse of the global credit boom and the ensuing financial crisis, which has affected asset values, credit conditions, and consumer and business confidence around the world.  The immediate trigger of the crisis was the end of housing booms in the United States and other countries and the associated problems in mortgage markets, notably the collapse of the U.S. subprime mortgage market.  Conditions in housing and mortgage markets have proved a serious drag on the broader economy both directly, through their impact on residential construction and related industries and on household wealth, and indirectly, through the effects of rising mortgage delinquencies on the health of financial institutions.  Recent data show that residential construction and sales continue to be very weak, house prices continue to fall, and foreclosure starts remain at very high levels.

The financial crisis intensified significantly in September and October.  In September, the Treasury and the Federal Housing Finance Agency placed the government-sponsored enterprises, Fannie Mae and Freddie Mac, into conservatorship, and Lehman Brothers Holdings filed for bankruptcy.  In the following weeks, several other large financial institutions failed, came to the brink of failure, or were acquired by competitors under distressed circumstances.  Losses at a prominent money market mutual fund prompted investors, who had traditionally considered money market mutual funds to be virtually risk-free, to withdraw large amounts from such funds.  The resulting outflows threatened the stability of short-term funding markets, particularly the commercial paper market, upon which corporations rely heavily for their short-term borrowing needs.  Concerns about potential losses also undermined confidence in wholesale bank funding markets, leading to further increases in bank borrowing costs and a tightening of credit availability from banks.

Recognizing the critical importance of the provision of credit to businesses and households from financial institutions, the Congress passed the Emergency Economic Stabilization Act last fall.  Under the authority granted by this act, the Treasury purchased preferred shares in a broad range of depository institutions to shore up their capital bases.  During this period, the Federal Deposit Insurance Corporation (FDIC) introduced its Temporary Liquidity Guarantee Program, which expanded its guarantees of bank liabilities to include selected senior unsecured obligations and all non-interest-bearing transactions deposits.  The Treasury–in concert with the Federal Reserve and the FDIC–provided packages of loans and guarantees to ensure the continued stability of Citigroup and Bank of America, two of the world’s largest banks.  Over this period, governments in many foreign countries also announced plans to stabilize their financial institutions, including through large-scale capital injections, expansions of deposit insurance, and guarantees of some forms of bank debt.

Faced with the significant deterioration in financial market conditions and a substantial worsening of the economic outlook, the Federal Open Market Committee (FOMC) continued to ease monetary policy aggressively in the final months of 2008, including a rate cut coordinated with five other major central banks.  In December the FOMC brought its target for the federal funds rate to a historically low range of 0 to 1/4 percent, where it remains today.  The FOMC anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

With the federal funds rate near its floor, the Federal Reserve has taken additional steps to ease credit conditions.  To support housing markets and economic activity more broadly, and to improve mortgage market functioning, the Federal Reserve has begun to purchase large amounts of agency debt and agency mortgage-backed securities.  Since the announcement of this program last November, the conforming fixed mortgage rate has fallen nearly 1 percentage point.  The Federal Reserve also established new lending facilities and expanded existing facilities to enhance the flow of credit to businesses and households.  In response to heightened stress in bank funding markets, we increased the size of the Term Auction Facility to help ensure that banks could obtain the funds they need to provide credit to their customers, and we expanded our network of swap lines with foreign central banks to ease conditions in interconnected dollar funding markets at home and abroad.  We also established new lending facilities to support the functioning of the commercial paper market and to ease pressures on money market mutual funds.  In an effort to restart securitization markets to support the extension of credit to consumers and small businesses, we joined with the Treasury to announce the Term Asset-Backed Securities Loan Facility (TALF).  The TALF is expected to begin extending loans soon.

The measures taken by the Federal Reserve, other U.S. government entities, and foreign governments since September have helped to restore a degree of stability to some financial markets.  In particular, strains in short-term funding markets have eased notably since the fall, and London interbank offered rates (Libor)–upon which borrowing costs for many households and businesses are based–have decreased sharply.  Conditions in the commercial paper market also have improved, even for lower-rated borrowers, and the sharp outflows from money market mutual funds seen in September have been replaced by modest inflows.  Corporate risk spreads have declined somewhat from extraordinarily high levels, although these spreads remain elevated by historical standards.  Likely spurred by the improvements in pricing and liquidity, issuance of investment-grade corporate bonds has been strong, and speculative-grade issuance, which was near zero in the fourth quarter, has picked up somewhat.  As I mentioned earlier, conforming fixed mortgage rates for households have declined.  Nevertheless, despite these favorable developments, significant stresses persist in many markets.  Notably, most securitization markets remain shut, other than that for conforming mortgages, and some financial institutions remain under pressure.

In light of ongoing concerns over the health of financial institutions, the Secretary of the Treasury recently announced a plan for further actions.  This plan includes four principal elements:  First, a new capital assistance program will be established to ensure that banks have adequate buffers of high-quality capital, based on the results of comprehensive stress tests to be conducted by the financial regulators, including the Federal Reserve.  Second is a public-private investment fund in which private capital will be leveraged with public funds to purchase legacy assets from financial institutions.  Third, the Federal Reserve, using capital provided by the Treasury, plans to expand the size and scope of the TALF to include securities backed by commercial real estate loans and potentially other types of asset-backed securities as well.  Fourth, the plan includes a range of measures to help prevent unnecessary foreclosures.  Together, over time these initiatives should further stabilize our financial institutions and markets, improving confidence and helping to restore the flow of credit needed to promote economic recovery.

Federal Reserve Transparency
The Federal Reserve is committed to keeping the Congress and the public informed about its lending programs and balance sheet.  For example, we continue to add to the information shown in the Fed’s H.4.1 statistical release, which provides weekly detail on the balance sheet and the amounts outstanding for each of the Federal Reserve’s lending facilities.  Extensive additional information about each of the Federal Reserve’s lending programs is available online.¹ The Fed also provides bimonthly reports to the Congress on each of its programs that rely on the section 13(3) authorities.  Generally, our disclosure policies reflect the current best practices of major central banks around the world.  In addition, the Federal Reserve’s internal controls and management practices are closely monitored by an independent inspector general, outside private-sector auditors, and internal management and operations divisions, and through periodic reviews by the Government Accountability Office.

All that said, we recognize that recent developments have led to a substantial increase in the public’s interest in the Fed’s programs and balance sheet.  For this reason, we at the Fed have begun a thorough review of our disclosure policies and the effectiveness of our communication.  Today I would like to highlight two initiatives.

First, to improve public access to information concerning Fed policies and programs, we recently unveiled a new section of our website that brings together in a systematic and comprehensive way the full range of information that the Federal Reserve already makes available, supplemented by explanations, discussions, and analyses.² We will use that website as one means of keeping the public and the Congress fully informed about Fed programs.

Second, at my request, Board Vice Chairman Donald Kohn is leading a committee that will review our current publications and disclosure policies relating to the Fed’s balance sheet and lending policies.  The presumption of the committee will be that the public has a right to know, and that the nondisclosure of information must be affirmatively justified by clearly articulated criteria for confidentiality, based on factors such as reasonable claims to privacy, the confidentiality of supervisory information, and the need to ensure the effectiveness of policy.

The Economic Outlook and the FOMC’s Quarterly Projections
In their economic projections for the January FOMC meeting, monetary policy makers substantially marked down their forecasts for real GDP this year relative to the forecasts they had prepared in October.  The central tendency of their most recent projections for real GDP implies a decline of 1/2 percent to 1-1/4 percent over the four quarters of 2009.  These projections reflect an expected significant contraction in the first half of this year combined with an anticipated gradual resumption of growth in the second half.  The central tendency for the unemployment rate in the fourth quarter of 2009 was marked up to a range of 8-1/2 percent to 8-3/4 percent.  Federal Reserve policymakers continued to expect moderate expansion next year, with a central tendency of 2-1/2 percent to 3-1/4 percent growth in real GDP and a decline in the unemployment rate by the end of 2010 to a central tendency of 8 percent to 8-1/4 percent.  FOMC participants marked down their projections for overall inflation in 2009 to a central tendency of 1/4 percent to 1 percent, reflecting expected weakness in commodity prices and the disinflationary effects of significant economic slack.  The projections for core inflation also were marked down, to a central tendency bracketing 1 percent.  Both overall and core inflation are expected to remain low over the next two years.

This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside.  One risk arises from the global nature of the slowdown, which could adversely affect U.S. exports and financial conditions to an even greater degree than currently expected.  Another risk derives from the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing.  To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets.  If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability–and only if that is the case, in my view–there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.  If financial conditions improve, the economy will be increasingly supported by fiscal and monetary stimulus, the salutary effects of the steep decline in energy prices since last summer, and the better alignment of business inventories and final sales, as well as the increased availability of credit.

To further increase the information conveyed by the quarterly projections, FOMC participants agreed in January to begin publishing their estimates of the values to which they expect key economic variables to converge over the longer run (say, at a horizon of five or six years), under the assumption of appropriate monetary policy and in the absence of new shocks to the economy.  The central tendency for the participants’ estimates of the longer-run growth rate of real GDP is 2-1/2 percent to 2-3/4 percent; the central tendency for the longer-run rate of unemployment is 4-3/4 percent to 5 percent; and the central tendency for the longer-run rate of inflation is 1-3/4 percent to 2 percent, with the majority of participants looking for 2 percent inflation in the long run.  These values are all notably different from the central tendencies of the projections for 2010 and 2011, reflecting the view of policymakers that a full recovery of the economy from the current recession is likely to take more than two or three years.

The longer-run projections for output growth and unemployment may be interpreted as the Committee’s estimates of the rate of growth of output and the unemployment rate that are sustainable in the long run in the United States, taking into account important influences such as the trend growth rates of productivity and the labor force, improvements in worker education and skills, the efficiency of the labor market at matching workers and jobs, government policies affecting technological development or the labor market, and other factors.  The longer-run projections of inflation may be interpreted, in turn, as the rate of inflation that FOMC participants see as most consistent with the dual mandate given to it by the Congress–that is, the rate of inflation that promotes maximum sustainable employment while also delivering reasonable price stability.  This further extension of the quarterly projections should provide the public a clearer picture of the FOMC’s policy strategy for promoting maximum employment and price stability over time.  Also, increased clarity about the FOMC’s views regarding longer-run inflation should help to better stabilize the public’s inflation expectations, thus contributing to keeping actual inflation from rising too high or falling too low.

At the time of our last Monetary Policy Report, the Federal Reserve was confronted with both high inflation and rising unemployment.  Since that report, however, inflation pressures have receded dramatically while the rise in the unemployment rate has accelerated and financial conditions have deteriorated.  In light of these developments, the Federal Reserve is committed to using all available tools to stimulate economic activity and to improve financial market functioning.  Toward that end, we have reduced the target for the federal funds rate close to zero and we have established a number of programs to increase the flow of credit to key sectors of the economy.  We believe that these actions, combined with the broad range of other fiscal and financial measures being put in place, will contribute to a gradual resumption of economic growth and improvement in labor market conditions in a context of low inflation.  We will continue to work closely with the Congress and the Administration to explore means of fulfilling our mission of promoting maximum employment and price stability.

Nice chart via the boys at Bespoke: