Bookkeeping

The FOMC remains very concerned about the economic and financial outlook. The Fed's balance sheet recently has shrunk modestly, but that does not reflect any deliberate actions. The Fed's support of commercial paper has unwound as activity in that market has declined. The Fed's balance sheet should start to grow again as the TALF program ramps up. Moreover, the decision to boost purchases of agency debt and mortgages, and to start directly buying Treasuries, suggests that the Fed's balance sheet will mushroom in the months ahead. The key point is that monetary policy will remain highly accommodative and proactive until there are signs that financial intermediation is working more effectively. The Fed's actions should be positive for both stocks and bonds.

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