The Fed met again this week and the news was pretty clear. The Fed needs to stay in the game to keep the economy growing and keep mortgage rates down. That’s good. Very good.
What else did the Fed talk about in their latest release?
They don’t like deflation. Deflation is when prices drop and people are hesitant to make big purchases because they think they’ll get a better deal if they wait. This nearly destroyed Japan’s economy and they are (after many years) finally getting a grip on it. The Fed doesn’t like deflation and we don’t either. Nobody should like deflation. It’s a very bad thing.
I don’t want to give all the fun away. Read on to learn more. Here it is, the latest Federal Reserve Release in plain English (my commentary is in bold).
Information received since the Federal Open Market Committee met in September generally suggests that economic activity has continued to expand at a moderate pace. Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated. Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.
This is the “yeah, but” paragraph. Jobs are picking up, but unemployment is still too high. People and businesses are spending more, but housing slowed down a bit. Prices aren’t rising as much as the Fed would like (yep – the Fed actually wants prices to rise to some degree), but they aren’t worried about it.
The most interesting sentence in that paragraph was the shortest one. “Fiscal policy is restraining economic growth.” Basically, the Fed is saying – “Hey, Congress people! Stop screwing around with the debt ceiling! You’re slowing down the economy with your hijinx!”
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
The Fed says here that they think the economy will pick back up, despite its recent drop off. They also think prices will start to rise again (but at a pace that isn’t alarming).
Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee 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 and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.
If you like low mortgage rates –you like this last paragraph. The Fed says here that they will keep on buying truckloads of mortgage bonds. That keeps mortgage rates low. The market had been fearing that the Fed would slow down their purchases of mortgage bonds (referred to as “tapering”). This extension of the buying makes us happy.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
This is the “we’re going to do our job by continuing to watch the economy, have meetings about the economy, read reports about the economy and whatnot,” paragraph. Thanks, Fed!
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
The Fed reaffirms they will keep short-term rates low for quite some time. Keep in mind that short term rates don’t always translate to long term rates – so this isn’t a guarantee that rates like 30-year mortgage rates will stay low. There are other market forces that could move them higher.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H. Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.
All the Federal accountants didn’t agree! Esther George is the worry wart. She thinks all this cheap money could cause a problem in the future. The rest of the Feds are sleeping well at night and feel good about low rates and big mortgage bond purchases.