Economic analysts were impatient to see if the Fed would remove the word “patient” from its meeting statement this month. Go figure. It turns out they did remove the word patient, but with the Fed almost bending over backwards to say it didn’t mean anything, nothing earth-shattering really happened. This made the markets very happy.
This month’s Fed release is below. My comments are highlighted in bold.
Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. A range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow and export growth has weakened. Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
Pause. When the Fed last chatted with us (way back on January 28), they started out by saying that “economic activity has been expanding at a solid pace.” That was exciting! This time, they started with a wet blanket, saying, “Information … in January suggests that economic growth has moderated somewhat.” Hmmm … I guess the Feds aren’t as enthusiastic as they were a month and a half ago. They are still happy with the improving jobs picture – but they worry about how things are going in the housing sector. Peeps just aren’t building homes as fast as we’d all like to see.
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 continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of energy price declines and other factors dissipate. The Committee continues to monitor inflation developments closely.
This is the “we’re doing our job” paragraph. Yeah, yeah – we get it. You’re trying to keep people working while keeping price increases at a moderate level. They also tell us they wish inflation (prices) would rise a little more than they are. (They worry, when prices aren’t rising, that people put off buying stuff because they think it might cost less in the future – or at the very least that it won’t cost a lot more.)
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, 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 and international developments. Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.
“Patient” no more! The big concern by big-shot bond traders going into today was, “Will the Fed remove the word ‘patient’ from this paragraph?” (Meaning, “Will the Fed signal that they are getting closer to moving short-term rates up?”) Guess what?! They did remove it! And, as you now know, the world promptly came to an end. Or not. They did come out and say that they think an increase in short-term rates is “unlikely” at their April meeting. The last sentence (which I conveniently underlined for you) is also important. This is a “Hey world, don’t freak out” sentence. The Fed is telling everyone that they haven’t made up their mind as to when they will start raising short-term rates.
The last three paragraphs made the markets quite happy. Stocks also went up today. So all in all, a happy day. Thanks, Fed!
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. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
The Fed has a tiny little investment in mortgage bonds (only about $1.25 trillion…). When they get the monthly payments that homeowners make, they reinvest that money by buying more mortgage bonds. In this paragraph, they say they are going to keep doing that. Sweet.
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.
In this paragraph, the Fed says they won’t go nuts when it comes time to move short-term rates higher. That makes me feel better.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.
All the Fed agreed! Woo.
That’s all, folks! Got a question or a comment on the Fed announcement? Feel free to share it below.
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