After all the hullabaloo, the Federal Reserve decided to raise short-term interest rates by a quarter point at the conclusion of two days of meetings. So far, I can confirm the world hasn’t ended.
In all seriousness, though, the Fed promised rate hikes would be gradual and that’s a good thing for consumers.
I’ve placed my analysis of the press release below. My comments are in bold.
Information received since the Federal Open Market Committee met in October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down.
I call this the “report card” paragraph. The Fed takes a look back and tells us how little Johnny Economy has done since the last report card came out. The grades came in like this: Overall economy performance, B-; Household spending and business investment, A-; Housing, B; Net exports, C-; Penmanship, A+. Not bad, Johnny. We’re taking you to Dairy Queen for a banana split. The Fed also tells us that inflation is lower than they would like and they attribute that to falling energy prices. The Fed might be bummed, but I filled up for less than $2.00 a gallon this morning and that was sweet.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen. Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.
Here’s where the Fed tells us that they are always trying to balance people having jobs with prices that aren’t out of control. Cutting through their economist-speak, they think jobs and prices are in balance right now. They also say they will continue to monitor inflation closely. Do they really need to say that? Thanks for being so conscientious, Fed!
The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
This is the “yes and there’s also” paragraph that all the hubbub* has been about. After seven long years, the Fed has moved up short-term rates. You can see from this bonus chart I provide (free of charge!) that shows the rate the Fed controls –surprisingly called the “Fed Funds Rate” – that rates are rarely unchanged for such a long period of time. See that flat part to the far right? That represents seven years of short-term rates basically at 0%. The Fed kept short-term rates this low for so long to fight the financial crash we endured in 2008. It’s big news now that they are starting to slowly increase that short-term rate again.
* hubbub hub-bub (noun) a chaotic din caused by a crowd of people. A busy, noisy situation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to 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. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Fed says here that, when they determine when, and how much, to change short-term rates in the future – they will watch the economy, jobs and inflation. The sentence I italicized is significant. This is the one that keeps our 30-year rate low after the announcement (yay!) and it’s also the one that is making the stock market happy –the Dow closed up 220 points. Basically, the Fed is saying they will go slow and keep rates low. “Slow and low.” We like that.
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, and it anticipates doing so until normalization of the level of the federal funds rate is well underway. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
This is a complex paragraph – then again, aren’t they all? – that says the Fed is taking the principal payments they get on the trillion dollars of mortgages they own and are reinvesting those principal payments back into more mortgage bonds. What does that do? That keeps mortgage rates lower than they would be if they didn’t do that. Thanks yet again, Fed!
Voting for the Federal Open Market Committee 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! There is joy in Econoville!
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