Wednesday, January 2, 2008

FOMC Minutes

In the opening paragraphs of the minutes we had this:

The Committee approved a foreign currency swap arrangement with the Swiss National Bank that paralleled the arrangement with the European Central Bank approved during the Committee’s conference call on December 6, 2007. With Mr. Poole dissenting, the Committee voted to direct the Federal Reserve Bank of New York to establish and maintain a reciprocal currency (swap) arrangement for the System Open Market Account with the Swiss National Bank in an amount not to exceed $4 billion. The Committee authorized associated draws of up to the full amount of $4 billion, and the arrangement itself was authorized for a period of up to 180 days unless extended by the FOMC. Mr. Poole dissented because he viewed the swap agreement as unnecessary in light of the size of the Swiss National Bank’s dollar-denominated foreign exchange reserves.

Here's more from the minutes on the December 6th conference call:

The first proposal was for the establishment of a temporary Term Auction Facility (TAF), which would provide term funding to eligible depository institutions through an auction mechanism beginning in mid-December.

The minutes ended with this:

*Secretary's Note: The Board of Governors approved the TAF via notation vote on December 10, 2007 after the staff finalized its proposal for specifications of the TAF.

Why is this important? Because the Fed cut rates by only 25 basis points on December 11th, and the market promptly fell 300 points. After the close, the Fed leaked to the market that they were days away from other flexible sources of funding. By 8:00 am, the next morning on December 12th, the Fed announced all the TAF agreements, and the S&P futures gapped up 30 points, and the Dow futures were up 276 points.

That would make the definition of mid-December by the Fed to be the 12th. The Fed, with a Q &A with Grep Ip of the WSJ said that it was announced on the 12th, after the Fed meeting, because Europe was closed, and that certain aspects of the plan required FOMC approval and that " reaction yesterday (the sell-off on December 11 after the 25 basis point cut) had nothing to do with today's announcement."

Despite the Fed's protestations, with today's minutes it's obvious the Fed flip flopped.

Maybe they can wear Romney's shoes.

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