Debt commission takes aim at country’s fiscal woes

The bi-partisan debt commission appointed by President Barack Obama officially unveiled its plan to tackled the nation’s fiscal woes and return some form of sanity to the federal budget.

Tasked with coming up with recommendations to bring the deficit under control, the commission spared virtually no one in an effort to lop off nearly $4 trillion from the budget deficit by 2020.

And its across-the-board approach, which will cause consternation in many quarters, may be its greatest strength because compromise must involve some give and take.


The Extended-Baseline Scenario generally assumes continuation of current law. The Alternative Fiscal Scenario incorporates several changes to current law considered likely to happen, including the renewal of the 2001/2003 tax cuts on income below $250,000 per year, continued Alternative Minimum Tax (AMT) patches, the continuation of the estate tax at 2009 levels, and continued Medicare “Doc Fixes.” The Alternative Fiscal Scenario also assumes discretionary spending grows with Gross Domestic Product (GDP) rather than to inflation over the next decade, that revenue does not increase as a percent of GDP after 2020, and that certain cost-reducing measures in the health reform legislation are unsuccessful in slowing cost growth after 2020.

The chart above provides a stark look at the looming fiscal disaster that awaits if nothing is done, assuming of course (see green line) that foreigners won't willingly buy an ever-growing supply of U.S debt that currently yields less than 3% (or near zero if one buys T-bills that mature in less than 90 days).

The commission’s proposal, which at first glance seems difficult to swallow, actually encompasses modest changes in entitlement and discretionary spending that most Americans should be able to adjust to. On a side note, the changes are much less onerous than the nasty recession that we have all been forced, to some degree, to deal with.

Just the facts
An overview of the plan:
• Achieve nearly $4 trillion in deficit reduction through 2020, more than any effort in the nation’s history.
• Reduce the deficit to 2.3% of GDP by 2015 (2.4% excluding Social Security reform), exceeding President’s goal of primary balance (about 3% of GDP).2
• Sharply reduce tax rates, abolish the AMT, and cut backdoor spending in the tax code.
• Cap revenue at 21% of GDP and get spending below 22% and eventually to 21%.
• Ensure lasting Social Security solvency, prevent the projected 22% cuts to come in 2037, reduce elderly poverty, and distribute the burden fairly.
• Stabilize debt by 2014 and reduce debt to 60% of GDP by 2023 and 40% by 2035.


Note: Plausible baseline resembles CBO’s Alternative Fiscal Scenario, assuming the continuation of the 2001/2003 tax cuts protected by Statutory PAYGO, estate tax and AMT policies at 2009 levels, and a Medicare physicians' pay freeze. The baseline also assumes discretionary spending as requested in the President’s Budget and a gradual phase down of the conflicts in Iraq and Afghanistan.
2 Note that increases in this deficit level as compared to the Co-Chairs’ November 10, 2010, draft do not reflect major policy changes, but rather baseline changes to more honestly (and conservatively) account for the costs of the conflicts in Iraq and Afghanistan

Digging down into some of the components of the plan, the full retirement age for social security, which is already scheduled to rise to 67 in nearly 20 years, would rise to 68 by about 2050 and 69 by about 2075. The earliest one could receive benefits would increase lock step to 63 and 64, respectively.

Cost of living adjustments would be modified slightly, taxes on eligible income would increase gradually and the system would  become more progressive.

Discretionary spending also comes under the microscope.

If the plan passes, discretionary spending in 2012 would be equal to or lower than spending in 2011, and would then return spending to pre-crisis 2008 levels in real terms in 2013. Future spending growth would be limited to half the projected inflation rate through 2020.

The federal workforce, which has been exempt from the havoc caused by the recession, would drop by 10%, or 200,000, by 2020 primarily through attrition.

Medicare spending, which threatens to explode over the next 20 years, would also be impacted.

Don’t tax me, tax the fellow behind the tree
Those hoping the commission would focus entirely on spending are in for a disappointment but compromise dictates that taxes be a part of the equation.

In return for a simpler tax code that reduces tax brackets to as low as 8%, 14% and 23%, the cap of mortgage interest would be modified, deductions for charitable giving would change and gasoline taxes would rise by 15 cents per gallon – dedicated to transportation projects rather than the current practice of relying on deficit spending.

Additionally, the dreaded alternative minimum tax would finally die the death it so desperately deserves.

But can it pass?
The atmosphere on Capitol Hill is nothing short of poisonous.

The plan has been called “unacceptable” by at least one politician, while others view it as a starting point. Translation: how can its most '”onerous” provisions be eliminated while still passing something that shows Congress can get by with the minimum.

Of course, the recovery might just accelerate dramatically, reducing outlays while bringing in unexpected tax revenues.

But for a more likely scenario, one only has to look as far as Europe.  Greece barely avoided a financial meltdown thanks to an E.U. bailout, and Ireland quickly followed.  And now there are whispers that Portugal and Spain are next.

If the U.S. ever faces a crisis of confidence in its ability to rollover and expand its debt, the reaction in financial markets will be swift and violent, with the dollar and the stock market likely entering a free-fall. Interest rates would soar.

Spending and tax changes needed to deal with such a crisis would be draconian and unacceptable to most, as the only other alternative, monetizing the debt by the Fed, would quickly create hyperinflation.

The current plan is a bi-partisan solution that gives everyone something to cheer about and everyone something to gnash their teeth. But it provides lawmakers the cover to put this mess behind us and show the world the U.S. can and will get its fiscal house in order.

If passed, and that’s extremely questionable, it would provide a huge boost in confidence to foreign and U.S. investors alike and likely remove any chatter about whether the U.S. can sustain its triple-A credit rating.

It would also lay the groundwork for future growth that provides meaningful employment and the accumulation of wealth for this generation and generations to come.

Fed sees deflation as public enemy number one

Falling prices, however, are still remote

Tuesday’s Fed statement had all the markings of a central bank that seems ready to pull the trigger on a more aggressive round of quantitative easing, i.e., purchases of longer-term Treasurys in order to fight a perceived threat – deflation.

And its remarks weren’t lost on bond traders, who snapped up government bonds in anticipation of new buying.

Comments such as, “Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.”

And it is “… prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

Still, the Fed did leave itself an out as it said it still expects inflation to rise “to levels the Committee considers consistent with its mandate.” At a minimum, the comment suggests that policymakers believe the odds inflation will fall below zero are still remote.

Don’t know much about history

First a short history lesson is in order. Looking back at the last six years, the Consumer Price Index moved in a mostly upward trend until July 2008, when it peaked at 5.5%, its highest level since January 2001, according to BLS data.



Higher food prices lent support to the headline number, but big gains in crude oil were the primary culprit.  Who can forget gasoline selling at $4 per gallon during the summer of 2008?

Core inflation, which minuses out food and energy, was more muted, as higher energy prices did not noticeably bleed into the general price level.

Enter the collapse of oil prices and the onset of the Great Recession:  headline inflation plunged to levels not seen since the early days of the Truman administration.

The disinflationary trend (a falling rate of inflation) in core inflation, however, has been more gradual, as annual price increases fell back below 2%, generally considered the top end of the Fed’s comfort zone, in December 2008.

From there, core inflation has gradually been heading south amid the rise in unemployment, falling/sluggish demand in the economy and weak wage growth.



The second chart highlights the subtle slide in core inflation pressures and the eventual descent below 1%, which is generally considered the bottom of the range of what the Fed is comfortable with.

Note, however, that core inflation has been holding steady at 0.9% over the past five month, interrupting the downward trend that actually began in late 2006 (see top chart).  And commodity prices have exhibited modest strength in recent weeks, suggesting the global recovery is continuing uninterrupted.

It would be highly unlikely that deflation could take hold in the U.S. without a significant drop in commodity prices.

Still, it’s still too early to call a bottom, but the slowly expanding economy seems likely to put a floor under prices and prevent a slide to zero, in my view.

Turning Japanese?

Japan saw its twin bubbles, stocks and real estate, burst in 1990, which was followed by feeble attempts by the Bank of Japan to revive the economy.  Instead, huge government outlays were tried without much success.

Many, including myself, believe that the BoJ was too slow to act, and the Japanese economy eventually slid into a deflationary swamp.

Taking its cues from Japan, Ben Bernanke took a much harsher tone on the rate front. And when he  ran out of bullets in his conventional arsenal, the Fed authorized purchases of government securities.

The big concern is that falling prices will further encourage consumers to put off purchases and weaken the recovery or send the economy into another recession.

And falling wages, which would likely ensue, would exacerbate tensions in the financial markets.  Debt, however, does not shrink on its own, increasing the odds of more defaults.

So it’s easy to see why deflation is not the preferred outcome. Put more bluntly, it’s to be avoided.

Let’s create lots of money

The Fed chief, who earned the nickname Helicopter Ben for his remark in a 2002 speech that “a money-financed tax cut is essentially equivalent to Milton Friedman's famous ‘helicopter drop’ of money,” appears ready to leave the landing pad with a pile of cash.

Some question whether such a strategy will truly boost growth amid lackluster consumer and business  confidence and a skittish public that has shied away from borrowing, even at rock-bottom rates. There are risks to such a strategy, and it could mark the beginning phase of a new bubble, but the Fed appears determined to avoid a Japan-like outcome.

Fed meeting holds few surprises

The Federal Reserve met to day and decided to keep policy unchanged, but warned that it could taken action down the road if conditions deteriorate. More details on the statement at Examiner.

What I want to do in this space is look at some of the subtle shifts in the language of today’s statement versus the one released August 10 and provide an interpretation.

Starting at the top, the Fed maintained that spending on business equipment and software is still rising but added that increases are coming “less rapidly than earlier in the year." However, though it noted that bank lending continues to contract, the decline has been “at a reduced rate in recent months.”  Not much in the way of good news, but a turnaround in lending is a prerequisite for a more robust recovery.

The second paragraph gets to the crux of the statement and reveals that the FOMC is growing more concerned about prices.

In the prior statement, the Committee said:

“Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.”

The latest version details growing worries:

“Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.”

The extensive language almost seems contradictory. On the one hand, the Fed clearly states for the first time what we all know – inflation is too low, and Fed officials are growing increasingly concerned.  On the other hand, that last clause suggests that everything will work itself out, and the economy will not experience deflation.

At a minimum, the Fed seems to be saying that falling prices are still just a remote possibility.

Moving on the FOMC did seem to inch closer to new measures, making just subtle changes in its verbiage.

“The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.”

versus:

“The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if need to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

Note the more overt "return inflation, over time, to levels consistent with its mandate" compared with the more generic "promote...price stability."  

Final thoughts

The Fed still believes deflation is a remote possibility, but direct references about falling inflation indicate that monetary officials also believe the odds have risen, and policymakers aren’t taking any chances.

Hence, they remain ready and willing to employ all necessary tools at their disposal to prevent what happened in Japan from washing up on the shores of the U.S. economy.

Greenspan on Bush tax cuts: let them expire

Former Fed Chief Alan Greenspan said yesterday that Congress and the president should let the Bush tax cuts expire at the end of the year, surprising many who see Greenspan as a champion of free markets and limited government.

Noting that this is the first time in his memory that he has favored raising taxes (though he did favor tax hikes in the early 1980s to save social security), his seemingly reluctant admission stems from his fear that the country does not have much time to implement a credible deficit reduction plan and send a signal to the financial markets and global purchasers of Treasurys that the U.S. is serious about tackling its fiscal imbalances (see Greenspan warns on deficit spending, calls for immediate action).

A broad tax increase at this juncture in the business cycles would be extremely risky and could easily tip the economy back into a recession since a reduction in disposable income may be remedied by reduced spending.

One has to wonder if Greenspan, whose tenure at Fed has been tarnished by the implosion in housing, has come to the conclusion that deep spending cuts, including reductions in popular entitlement programs, will not be forthcoming no matter who controls Congress in 2011.

Despite inefficiencies in the public sector, Washington has done little to rein in spending over the past 50 years.  And when it has occurred, brief bursts of fiscal sanity were followed by a renewed spate in outlays. 

Hence, as he put it, the choice to raise or not raise taxes is not a choice "between good and bad; it’s between terrible and worse."

One policy option Bernanke wants to avoid

Raising its inflation target

In his long-awaited and closely-followed speech yesterday, Fed Chairman Ben Bernanke discussed how three policy options that could be used to prop up the economy that are still available in the Fed’s arsenal:

1. Purchases of additional longer-term securities
2. Modifying the Fed’s communication
3. Reducing the interest rate the Fed pays on bank reserves.

In each case, he discussed how these might boost the economy and also talked about the drawbacks of each option.

One measure that seems unlikely to be introduced that received some play in Friday’s speech was the idea of “raising medium-term inflation goals above levels consistent with price stability.”

Besides going against the Fed’s dual mandate, which includes price stability, Bernanke said he sees “no support for this option on the FOMC.”

He noted, “Inflation expectations appear reasonably well-anchored, and both inflation expectations and actual inflation remain within a range consistent with price stability….inflation would be higher and probably more volatile under such a policy, undermining confidence and the ability of firms and households to make longer-term plans, while squandering the Fed's hard-won inflation credibility.

“Inflation expectations would also likely become significantly less stable, and risk premiums in asset markets--including inflation risk premiums--would rise. The combination of increased uncertainty for households and businesses, higher risk premiums in financial markets, and the potential for destabilizing movements in commodity and currency markets would likely overwhelm any benefits arising from this strategy.”

Well put.

An overview and analysis of  his remarks are available in my article entitled, Bernanke talks up policy options to ensure growth.

Did Bernanke take a swipe at Washington?

Economists and bankers gathered together today at Jackson Hole, Wyoming to listen to Fed Chairman Ben Bernanke’s views on the economy (text at Fed’s website).

As expected, he acknowledged growth has been far from robust and detailed some of the policy actions the Fed might take to ensure the economy won’t slide into an new recession.

One interesting comment he made regarding the lackluster job recovery:

“Firms are reluctant to add permanent employees, citing slow growth of sales and elevated economic and regulatory uncertainty.”

Bernanke did not elaborate on what he meant by elevated regulatory uncertainty, but newly-passed healthcare and financial reform and the remote possibility that cap and trade legislation could still pass in a lame duck session of Congress come to mind.

With the economy emerging from the worst recession in over 70 years and a jobless recovery all but guaranteed at least through the end of the year, it is important for the president and Congress to focus on economic activity and help alleviate the burdens millions face on the unemployment roles.

Pet agendas should be set aside until the economy is on a much firmer footing. At that point, robust debate can begin.

Fed minutes: rate hike later rather than sooner

Fed officials indicated in the minutes from the last meeting that a rate hike is contingent upon the economic recovery. And in my view, much will depend on how quickly the economy generates new jobs.

The minutes noted that the Fed's current language that interest rates will stay low for an extended period is not designed to box policymakers in by explicitly telegraphing to the financial markets that rates will stay near zero for several more months.

"A number of members noted that the Committee's expectation for policy was explicitly contingent on the evolution of the economy rather than on the passage of any fixed amount of calendar time.

"Consequently, such forward guidance would not limit the Committee's ability to commence monetary policy tightening promptly if evidence suggested that economic activity was accelerating markedly or underlying inflation was rising notably; conversely, the duration of the extended period prior to policy firming might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further."

Still, despite relatively upbeat economic reports that have come out recently, most officials anticipate a modest recovery and some warned against raising rates too soon.

Obama attempts to jump-start job creation

Nonfarm payrolls fell less than expected in May but the unemployment rate surged to a 26-year high of 9.4% last month, igniting criticism that President Barack Obama's recently-passed stimulus package is not doing enough to alleviate growing unemployment lines.

The Roadmap to Recovery as it is called is designed to save or create 600,000 jobs this summer, including 125,000 jobs for teenagers. Many of these positions are in education, health services, law enforcement, and infrastructure.

Republicans were quick to express skepticism, noting that the projections appear to be rosy. From my vantage point, the stimulus spending is far too narrow. Let's face it, if you are over 20 years old and not in construction, law enforcement or health care, the extra dollars won't be very helpful.

Bernanke worries about deficits

Fed Chairman Ben Bernanke discussed the economic outlook before House Committee this morning. He conceded that the unemployment rate is likely to keep rising for a while but also believes the worst is past. I detail some of his remarks in my article, Fed Chief Bernanke Believes Worst is Over.

In this post, I wanted to key in on one of his final remarks. Given that the recession has drastically reduced revenues at a time when government spending is soaring, the federal deficit has exploded.

The current administration sees red ink of:

• $1.8 trillion in fiscal 2009
• $1.3 trillion in fiscal 2010
• $900 billion in fiscal 2011

Let's do the math: $4 trillion in just three years! That's sobering and leaves one in a daze as it seems incomprehensible. Sadly, it's not.

Bernanke said this will take the ratio of federal debt held by the public to nominal GDP from about 40% before the onset of the financial crisis to about 70% in 2011. These developments would leave the debt-to-GDP ratio at its highest level since the early 1950s, the years following the massive debt buildup during World War II.

Keep in mind that after WWII, Social Security was still in its infancy, and we did not have the massive social programs that are now in place. In addition, universal health coverage is looming without a clear way to pay for it.

Bernanke did specifically mentioned Social Security and Medicare and warned, "With the ratio of debt to GDP already elevated, we will not be able to continue borrowing indefinitely to meet these demands."

Let me repeat: We will not be able to continue borrowing indefinitely.

The Fed, along with central banks around the world, were able to avert a financial catastrophe late last year. But the problem now is more like a slow boil. We know where we're headed and action on the spending front must be taken.

Recognizing that both political parties have done a poor job holding the line on government spending, I must ask, "Where are all the political pundits who decried the 'massive' Bush deficit's now?"

Any comments are appreciated.

Credit card rules likely to change

The Senate voted 90-5 to overhaul regulations governing credit cards. "This is a victory for every American consumer who has ever suffered at the hands of a credit card company," said Sen. Christopher Dodd, D-Conn.

Senator Harry Reid of Nevada pounded his chest and noted, “We stood up for consumers and stood up to abusive credit card companies,” The Senate's "courageous" move followed a 357-to-70 vote in the House last month. Differences still need to be ironed out, but in this atmosphere, that should come quickly.

But "what has been a short-term revolving unsecured loan will now become a medium-term unsecured loan, which is significantly more risky," said the president and CEO of the American Bankers Association. He added, "It is a fundamental rule of lending that an increase in risk means that less credit will be available and that the credit that is available will often have a higher interest rate."

The truth is probably somewhere in between. Do credit card agreements really need to have all of that fine print that few understand or take the time to read? But what concerns me is that those who have been paying their bills on time, and paying them in full, will now be subsidizing consumers who default or pay slowly.

The ramifications: Reward programs and grace periods could be pared back, while no-annual fee cards may become endangered.

I realize there are abuses among some card companies. But Congress' haste to pass legislation will likely go overboard and unintended consequences may abound.

A closer look at the trade deficit

There’s nothing like a good old-fashioned recession to bring the US trade deficit back down to more reasonable levels. Don’t get me wrong, there isn’t much good about a recession and the consequences that have sprung out of the global slump have been economically devastating on many.

Besides, there really isn’t anything old fashioned about this contraction either. Most recessions are inventory corrections, i.e., companies slash production as a result over too much stuff in their warehouses and ramp production back up when goods on hand return to reasonable levels. This one, however, has been brought on by massive and painful deleveraging in the economy.

But for now, let’s look at one silver lining – the big drop in the US trade gap.

The bite from oil imports has lessened dramatically and is the single largest reason why imports have fallen. In the first three months of 2009, our bill for crude fell to$37.4 billion, down from $85.1 billion, according to the US Census Bureau.

But that’s now at all. Falling demand in the US has translated into fewer imports across the board. It should be no surprise to anyone who has been looking at the financial news that auto imports are down. In fact, imports are down 50% to $32.0 billion in the first three months of the year versus the same period in 2008. And consumer and capital goods have also fallen significantly.

In the meantime, the global recession dented sales of goods overseas, pushing down exports of aircraft, autos, telecom equipment, and industrial supplies and materials.

It may come as a surprise to many that the US sends cars overseas, but the Census Bureau reported that autos, including parts and engines, are down about 40% to $17.3 billion in the first three months of 2009.

Exports do appear to be stabilizing, suggesting that the global contraction may be starting to abate. And China has shown signs of life over the past couple of months. A rise in demand would assist US exports, but oil prices have come well off the lows and are flirting with $60 per barrel. Thus, the best news on the trade gap may be behind us.

The deflation monster

There has been plenty of talk among Fed officials and financial pundits about deflation and the danger it poses to the economy. But what is deflation and why is it so scary? First, let’s define the term. Just as inflation is viewed as a general rise in the overall price level, deflation is the opposite – a general decline in prices.

Imagine renewing season tickets to your favorite sports team and paying less than the prior year or getting an upgrade for the same price. Or sitting down at a restaurant you frequent and being handed a new menu with lower prices. At first glance, it sounds like economic nirvana! Let’s be honest, who doesn’t like paying less?

But a general drop in overall price level has its dark side and could turn a severe recession into another depression. If falling prices take root in the economy, consumers would likely hold off on some purchases, further exacerbating the decline in economic activity. And businesses, faced with falling sales and profits, would respond by further slashing payrolls and/or cutting wages.

However, debt outstanding would remain intact and declining payrolls, combined with lower salaries, would likely push debt-strapped consumers further behind and into default. That would add pressure on an already-fragile banking system.

You can see how a downward spiral might get out of control.

Consequently, this economic scenario, which is akin to an economic black hole, is something the Federal Reserve and Fed Chairman Ben Bernanke are trying to avoid at all costs.

As many of us already know, wage growth has slowed considerably. But commodity prices, which virtually fell off of a cliff late last year, have edged off recent lows, while crude and gasoline prices have rebounded modestly.

Plus, the rate of deterioration in the economy appears to be slowing. Unless the rapid decline in economic activity continues, and the odds of this happening are starting to recede, the risk of deflation seems remote.

Other insightful articles can be viewed on my homepage at Examiner.com.

Steep recessions and subsequent recoveries

Much has been made about the current recession and there are lingering worries that the banking crisis and debacle in housing will prevent anything other than a sluggish recovery.

Tight credit conditions and the desire by banks to forgo all but the safest loans have many analysts concerned, including myself. And yesterday’s disappointing Gross Domestic Product report (see: GDP tumbles in 1Q) only served to remind us of the difficulties that must be overcome.

But we have seen the resilient American economy shake off tough times before and bounce back vibrantly as the chart below indicates. Despite the challenges we face, a decent rebound is a possibility.

1957-58 Recession - GDP

4Q1957	1Q1958	2Q1958	3Q1958	4Q1958	1Q1959
-4.2%	-10.4	2.4	9.6	9.5	7.9

1974-75 Recession - GDP

3Q1974	4Q1974	1Q1975	2Q1975	3Q1975	4Q1975
-3.8%	-1.6	-4.7	3.0	6.9	5.4

1981-82 Recession - GDP

4Q1981	1Q1982	2Q1982	3Q1982	4Q1982	1Q1983
-4.9%	-6.4	2.2	-1.5	0.4	5.0

Current Recession - GDP

3Q2008	4Q2008	1Q2009	2Q2009	3Q2009	4Q2009
-0.5%	-6.3	-6.1*	?	?	?

*advance Data provided by BEA Note: the current recession began in late 2007 but the full brunt was not felt until late 2008

Many of us are aware of the steep recession that occurred in the 1970s, which was followed by the Fed-led contraction of the early 1980s when interest rates soared to double-digit levels. Each of these slumps was followed by solid recoveries, though the late 1970s were plagued by high inflation.

But to find a larger two-quarter drop in GDP, one has to go back to the late 1950s. There are differences this time around, but like today, manufacturing was hard hit and global growth came under pressure. Still, the economy came roaring back.

Fed infers worst may be past

The Federal Reserve's decision to unanimously vote to keep the fed funds rate in the range of 0 to 0.25% comes as no surprise given the magnitude of the recession. As always, policymakers released a more detailed statement regarding the economy and recent actions taken to support economic activity.

For the most part, the Federal Open Market Committee (FOMC), which is the arm of the Fed that decides monetary policy and interest rates, made just small adjustments in its commentary. Fed officials just barely bumped up the assessment on the economy, noting that "household spending has shown signs of stabilizing" and the "outlook has improved modestly since the March meeting."

But the Committee remains concerned that inflation could fall to undesirable levels, and it reiterated that it will "employ all available tools" to promote a recovery and preserve price stability.

One item traders were looking closely at was whether the Fed would alter last month's decision to buy up to $300 billion of Treasury securities. Those hoping for new purchases or any details were disappointed as the Fed stood by its prior decision, and Treasury prices reacted negatively.

The Federal Reserve has taken extraordinary measures to prevent the worst recession in over 50 years from becoming our first depression since the 1930s. Fed Chief Ben Bernanke is probably the foremost expert on the causes of the Great Depression, and so far, the Fed can claim success.

But an eventual economic recovery presents Bernanke with a new challenge: How to carefully remove excess stimulus and prevent a new round of inflation from materializing without creating new turmoil in the bond markets.