The moment you’ve all been waiting for is finally here. I’m sure your social networks have been talking about it. I’m convinced your friends won’t stop talking about it. I’m also fairly certain that your mom has asked you about it.
That’s right – we’re back with another edition of the Federal Reserve Release in plain English…
…AND THE CROWD GOES WILD!
Last time, my fearless leader Sir Clayton Closson took the heed and did the write up. Needless to say, the masses compared his work to be like “Battlefield Earth” and my work to be more along the lines of “Shawshank Redemption.”
Regardless, let’s dive right in to what the Federal Open Market Committee had to say today! As always, my commentary is conveniently bolded for you.
Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.
In typical Fed fashion, they come out the gate and say that things are kind of/sort of getting better. They’re still worried about the economy. We’re still worried about the economy. We’re all a bunch of worried Walters. The good news out of this paragraph is that prices of things aren’t expected to go up much.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.
The Fed posse is worried that the economy is going to go “kablooey” if they don’t keep spending trillions to put interest rates down. They’re also worried that the economy can go “kablooey” and “klapoot” if the global economy keeps struggling. Can you tell that it was “Superhero Day” today on the Marketing team here?
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
This is the paragraph that people were anticipating more than whatever phone was announced yesterday. Here’s the rundown: the Fed is going to buy $40 billion of mortgage securities – bonds supported by mortgages – every month. The goal of this incredible tab is to get homeowners to refinance or buy houses more cheaply and thus spend more money on whatever phone was announced yesterday, the world’s largest Beanie Baby collection, or a life-size Chewbacca made of caramel. When people spend more moolah, companies hire more people to make the goods, and the economy skyrockets. That’s Macroeconomics 101 for you.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
This paragraph is a dandy, too. Take a look at the last sentence – this pretty much says that the Fed will buy whatever securities they want, in whatever size they want, as fast as they want. Wouldn’t that be nice?
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
Whoa! Did you read that? The Fed changed their mind. Instead of keeping rates low until 2014, they’re now going to keep them low through 2015! I’m sure Jeffery Lacker was thrilled with that, considering he was the lone ranger that voted “no” the past five FOMC meetings.
All kidding aside, this right here is important. This doesn’t mean that mortgage rates will stay at today’s levels until 2015. While the Fed has a lot of influence over mortgage rates, they don’t have complete control. If the economy were to heat up or if inflation popped up, 30-year fixed rates would rise quickly.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.
Told ya! Lacker was not happy and voted “no” again.
There you have it folks – another entertaining rendition of the Federal Reserve Release in common English.