The Latest Federal Reserve Release in Plain English 5.0

Here we go again. Another Fed release in plain English.

Federal Reserve Release in Common English - Quicken Loans Zing Blog Usually, my good friend, Eric “Professor” Mally, posts these, but he’s off today so I’ll take my best shot at it.

The Fed issued another release today and we’ve done our best to make it clear, consise, and easy to understand .

Not that the Fed would ever release anything that was confusing and full of lots of words that normal people like us gloss over when they read. No way, we just take something that’s already a really good read and make it gooder. Much gooder.

Without further delay, here’s the release and our crack at making it semi-understandable: 

Release Date: August 1, 2012
For immediate release 
 Now

Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

Most of this statement is just like the last one.  The exception is the part I underlined above.  The Fed says that the economy has slowed down so far this year.  One can only guess what President Obama and Mitt Romney yelled after they saw what the Fed said.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

As we’ve talked about in the past – the Fed has two jobs:  1) keep prices from rising a lot and 2) keep people working (by pushing rates lower when times are tough).  The Fed says here that they are spending more time working on the jobs part and less on the prices part.

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 expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

Short term rates will stay near 0% until late 2014.  Does that mean mortgage rates will also stay low until late 2014?  Not necessarily.  The Fed sets short term rates – not mortgage rates.  The markets do that…

The Committee also decided to 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. The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

Even though I just got done saying that the Fed doesn’t set mortgage rates – I kind of lied.  There is a way they can affect mortgage rates.  They can print money and buy mortgage bonds – which pushes mortgage rates lower.  They’ve been doing that over the past few years (and they’ve been doing it A LOT).  In this paragraph – they say they will keep doing that for a while.  Thanks Fed!

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 preferred to omit the description of the time period over which economic conditions are likely to warrant an exceptionally low level of the federal funds rate.

The Feds did not all agree.  Jeffrey M Lacker voted against keeping rates low for the 5th time this year. 

That’s it. The release. The whole release. And nothing but the release.

Hope we helped it make a little more sense.

Have a great day, friends.

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