Bob Walters is chief economist and vice president of the Capital Markets Group at Quicken Loans.
Here we go again. The Federal Reserve met again yesterday. The results? Pretty much the same as ever. Instead of me telling you here and telling you again, I’ll make it easy on you this month. Just read below to get the story – the latest 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 July suggests that economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains 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. Longer-term inflation expectations have remained stable.
This is still the “yeah, but” paragraph. The labor market is getting better, but the unemployment rate hasn’t come down. People are spending a bit more, but the housing sector is stuck. The Fed knows that when you play both sides of an issue, you can never be wrong (or right).
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, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.
If you’ll recall (I know, you have more important things than to recall this stuff), the Fed has two jobs: 1) Keep rates low enough to pump up the economy so lots of peeps are working, and 2) Keep rates high enough so the prices of stuff we buy don’t go up too much. In this paragraph, they are saying that they think those two things are “balanced,” which means they are equally worried (or not worried) about both.
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 October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 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.
More tapering! Remember, “tapering” means that the Fed is slowly backing off how many Treasury and mortgage bonds they buy each month. They were buying those bonds to push long-term rates down (so American homeowners could refinance, among other things). They don’t feel that the economy needs as much medicine anymore (because it’s doing better on its own), so they are slowing down (tapering).
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 end its current program of asset purchases at its next meeting. 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’re going to do our job” paragraph. It would be like if your doctor wrote you a note and said, “I will closely monitor your lab tests and I will use tools (like medicine and stethoscopes and those gagging tongue depressor thingies) until you feel better. Well, that’s good to know.
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 paragraph those fancy Wall Street traders fast forwarded to when this press release came out. They frantically looked to see if the words “for a considerable time” were still in the paragraph. When they saw those words, they jumped into the air and came down into the splits – James Brown style – because they were so happy. What “for a considerable time” means is that the Fed is saying they will keep short-term rates near 0% for a long time. If you’re a stock trader or a bond trader (or a mortgage banker), this makes you happy. As I type this, stocks are up some and bonds are about the same as they were before the announcement. So, the great news is, mortgage rates are still crazy low! Woo!
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 Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
This is the paragraph where the Fed says they won’t do anything stupid. I guess the Fed thinks that including this paragraph makes us all feel a little better knowing they aren’t insane. I know I do.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Narayana Kocherlakota; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action were Richard W. Fisher and Charles I. Plosser. President Fisher believed that the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee’s stated forward guidance. President Plosser objected to the guidance indicating 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,” because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee’s goals.
All the Fed did NOT agree! Charles Plosser didn’t like the Fed being so prescriptive about how long they will keep short-term rates low.
There it is. Another down and in the books. Any questions? Leave them below, please. And have a great day!
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