The links back to old stories on the blog this week are evidence of my having been on vacation for a while. And, in reality, I should have gotten to reading the FOMC August statement sooner. Though in fairness, the lack of major news coverage about it didn't inspire one to jump back into reading Fed speak. Nonetheless, as The New York Times and Justin Fox have also pointed out, the Fed did make a comment that seems to have signaled when the Fed plans to slow the printing presses down. Part of their statement:
Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. [...]
In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.
The Fed's language changed from "economic contracting is slowing" in its June statement to "leveling out" this month, a relatively significant change indicating their thinking. Translated, this means the Fed believes the recession over or will be over very soon. As such they will slow the money dump into the economy, as they have been doing through the purchase of Treasurys since 2008. Then we will probably see a slow, steady retraction of the Fed's balance sheet which expanded again this week back above $2 trillion.
The Fed also didn't seem to be worried about inflation in their statement either, and my guess is that Bernanke, who has said they are monitoring inflation closely and will pull the plug on the printing presses when the time is right, believes he has the situation under control. Time will tell if the all knowing maha's over at the Fed made the right timing call. But with inflation at -2.1% as of last month, the only real direction it's probably going is up.