Federal Reserve Press Release in Plain English 23.0 - Quicken Loans Zing Blog

It’s that time again. Ten men and women gathered in a room for two days before making an announcement that almost always moves the markets in one direction or another.

At yesterday’s meeting of the Federal Reserve’s Open Market Committee, it decided to hold short-term interest rates between 0.25% and 0.5%. In other words, it’ll continue to be relatively cheap to borrow money (including mortgages).

Ideally, the Federal Reserve would like to see a little bit of inflation because it encourages people to spend money now before the price goes up. The Fed’s target is 2% inflation. We’re not getting there as fast as they’d like.

Despite this, the Fed decided it had to hold short-term interest rates where they were in light of economic struggles around the world. I break the committee statements down for you below. My comments are in bold.

Information received since the Federal Open Market Committee met in January suggests that economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months. Household spending has been increasing at a moderate rate, and the housing sector has improved further; however, business-fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation picked up in recent months; however, it 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; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

However … It’s the “takeback” of words. You won the Lotto! However, Uncle Sam gets half. You’re an excellent candidate for this job. However, we gave it to someone else. The Fed dropped a few “howevers” on us in this paragraph. They told us families are spending more dough and home prices are doing better, however, businesses are spending less than expected and exporting less stuff. They tell us the labor market is getting better and inflation (prices) is rising a bit, however, inflation is still lower than the Fed would like to see. 

What are they getting at with the howevers? They’re backpedaling a bit. They see that, while the economy is generally doing OK, there are signs of potential trouble in paradise.

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 expand at a moderate pace and labor market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but 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.

Remember – the Fed’s job is to balance two things: 1) Keep people working and 2) Keep prices under control. In this paragraph, the Fed tells us they expect that the job thing is getting better. But, they drop another “however” bomb on us. Despite thinking the jobs picture is improving, they worry about “global economic and financial developments.” In other words, the massive drop in energy prices (which we all love at the pump) has thrown a lot of companies and countries for a loop. Those things have threatened economic improvement and the Fed is taking notice.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 0.25% to 0.5%. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2% inflation.

The Fed lets us know that, after pumping the brakes last time (they increased short term rates 0.25%), they are leaving short-term rates the same this time. This was expected by the markets.

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% 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%, 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.

This is the paragraph where the Fed tells us how they do their job. They will watch economic conditions.  They will take into account a lot of information. Of course. What did they think we thought they would be doing? 

The big line in that paragraph is the one I italicize. The Fed tells us they will keep rates low for quite a while. This made the bond market happy. Bond traders bought bonds. Bond prices went up.  When bond prices go up, rates go down. See this fun chart to see how happy bond traders were. (This also makes mortgage bankers happy!)

Federal Reserve Press Release in Plain English 25.0 - Quicken Loans Zing Blog

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 under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

The Fed geeks out here and lets bond traders know they will keep on taking the payments they get on the mortgage bonds they own and reinvesting that scratch back into more mortgage bonds. That makes mortgage bankers like us giddy with delight because it keeps mortgage rates lower than they would be versus if the Fed didn’t reinvest those monies.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 0.5% to 0.75%.

The Fed did not all agree!  Esther George wanted the Fed to push short term rates up another 0.25%. 

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