This is a guest post from Bob Walters, chief economist and vice president of the Capital Markets Group at Quicken Loans.
The Federal Open Market Committee met today, and things were pretty much the same since the last meeting. I can make this simple and short: The economy continues to recover, the Fed is cutting back on monthly bond purchases by another $10 billion a month, and they wish inflation was around 2%. Short-term rates are still being kept right around 0, but long-term rates, which are market-driven, may rise. This could affect mortgage rates.
So with that short intro, here’s the full Fed Release in plain English. My comments are in bold. As always, let me know if you have any questions.
Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months. Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated. Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.
It used to be the first paragraph of the Fed Release would go something like, “Jobs are improving, but not nearly enough. Housing is getting better, but slower than we want.” Now, it’s the opposite. Now we’re seeing stuff like, “Fiscal policy is slowing growth, but not as badly as it used to be.” In Fed-speak, this is good news! This means the Fed is starting to get happy. There is a spring in their steps. Basically, the Fed is starting to agree that the economy is finally getting back on better footing. Jobs are coming back. Spending is coming back. Of course, economists never like to get too giddy – so they let us know what they are still worried about too. But, all in all, this is as close to happy dance as these cats do.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
Again – this is the paragraph where the Fed tells us what their job is. If they were firemen, they’d be writing, “Consistent with our statutory mandate, the firemen seek to spray water on fires to cool them down and extinguish the flames.” Awesome. They also mention that they wish inflation would rise more closely to the 2% they’d like to see. Basically, they would be happy if the price of Cheetos, gasoline and Snuggies would go up a bit. Why? Because a little bit of price increase is good. If people think prices are going up, they tend to want to buy now rather than wait. That would make the Fed happy.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in July, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $15 billion per month rather than $20 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $20 billion per month rather than $25 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. The Committee’s sizable and still-increasing holdings of longer-term securities 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.
Here’s the paragraph all the Wall Street types quickly scanned to. This is the “show me the money” paragraph. Here, the Fed says they are cutting back once again the amount of Treasury and mortgage bonds they buy each month by another $10 billion. This is the fifth meeting in a row where they’ve cut another $10 billion from the amount of bonds they buy each month. If you recall, the Fed started buying giant amounts of bonds a few years back. They did so because nobody else was. They had already taken short-term rates to 0% – and the economy still wasn’t getting better. So they took extreme measures and started this bond buying program. They called it “quantitative easing.” It’s a fancy name, but what it really means is, “Get out of our way – we’re going to buy a lot of bonds!” Why did they do that? They did that because whenever you buy a lot of something, the price of that something rises. When the Fed bought a lot of bonds, the prices of those bonds went up. And when bond prices go up, the rates come down (the “why” is complicated – just trust me on this one). And when rates come down, people refinance and buy more houses or cars, and when people have more money, they spend more money – that’s good for the economy.
Now that the Fed thinks things are getting better, they are backing off. It’s kind of like doctors. When you are sick, they give you a bunch of medicine. When you start getting better, they may cut the dose but not all the way to nothing, because until they are sure you are better, they don’t want to chance it that the bug comes back.
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. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
This is the “we will do our job” 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 remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
This is the “low short-term rates are staying for quite a while,” paragraph. The Fed is telling us all that they will likely keep short-term rates around 0% for quite some time – especially if inflation stays low. As all smart mortgage bankers know, though, short-term rates aren’t the same as long-term rates. It’s quite possible that the Fed could keep short-term rates at 0%, but that the market, which determines long-term rates, could move longer rates (like a 30-year fixed mortgage) higher.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Narayana Kocherlakota; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo.
All the Fed, including a few new ones, agreed!
That’s that. Until the Fed meets again, take care.