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 July suggests that economic activity has been expanding at a moderate pace. Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and 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.
The Fed to leads off with the good news and the not- so- good news. The labor market is getting better, but unemployment is still high. Housing seems to be getting better, but mortgage rates are inching up…
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, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market. 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 see things getting better, but they worry that recent interest rate increases might slow things back down. The Fed also says that they worry that prices aren’t rising fast enough (hint: this is the deflation tie-in). They know that if prices of things like houses or cars aren’t rising (or are even falling), people delay purchasing those things. When they delay those purchases, the economy slows down. When the economy slows down, prices fall more and people delay their purchases more. That phenomenon is called the deflationary (or liquidity) trap. Feel free to wow your friends with that little gem of knowledge…
Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago 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.
This was our happy surprise. The Fed has been on a buying spree for the last few years. They’ve been buying tens of billions of dollars of mortgage bonds and Treasury bonds every week. They’re doing that to push the prices of those bonds higher which pushes mortgage rates lower. They are doing that to cause people and businesses to borrow more and buy more (to get the economy going). There had been a lot of talk recently speculating that the Fed would announce they were going to start to buy less of these bonds. The term people are using for that decision is called tapering. Summing up this paragraph (178 words), the Fed said they aren’t going to taper for now.
The market noticed. Rates dropped.
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.
The Fed will continue to monitor markets and the economy and take any appropriate actions. 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 says here they will keep short term rates at 0% as long as the unemployment rate is over 6.5% (it’s 7.3% today) and inflation is less than 2% (it’s 1.8% today).
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.
The release concludes with notes that all of the Fed did not agree! Esther George worried that all of the things the Fed is no doing could cause problems for the economic world in the future. Let’s hope she’s wrong.
So that’s that: The latest Fed release in plain English. What’s your take on the Fed’s latest news? Good? Bad? Neither?
Tell us what you think. We’d love to hear it.