A very vigorous Fed

If anyone doubted the Federal Reserve's resolve to face down the current liquidity crisis, today's statement from the Fed's Federal Open Market Committee (FOMC) should answer their concerns. In language that was refreshing for being direct and unambiguous, the Fed stated the following:

  1. The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and preserve price stability.

  2. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities...and stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant.

  3. The [FOMC] also is prepared to purchase longer-term Treasury securities if evolving circumstances [warrant.].

  4. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses.

Though normally conservative by nature, I welcome the Fed's vigorous stand. The global deflation in asset prices, kicked off by the botched private sector response to the banking sector's asset problems in late 2007 and catalyzed by the abysmal political response last fall, has the potential to do a lot more damage.

In contrast with some of the truly wacky ideas being tossed around (like the notion that a massive government spending program is going to solve the problem), the Fed's actions indicate a sound understanding of the deep dislocations currently occurring in the capital markets. Their vigorous response to the credit log jam is the only thing staving off a total collapse.