At its January meeting concluded Wednesday, the Federal Reserve’s Federal Open Market Committee chose to leave short-term interest rates when they stood. Although not directly correlated, longer-term rates for things like mortgages tend to follow the general direction of the federal funds rate controlled by the Committee. Revolving accounts for things like credit cards tend to be in lockstep with this short-term rate because the interest rate can change on a monthly basis.
After the meeting, analysts took note that the Federal Reserve seemed to be indicating a stronger desire for higher inflation. Household spending was also only viewed as rising at a moderate pace in comparison to a strong growth rating in December. Part of that could be coming down after the holiday season, but it’s something to keep an eye on.
If you happen to be in the market for a mortgage, rates have generally been moving lower recently and nothing about this statement looks like it would change that current environment. It’s a great time to lock your rate and protect yourself from future upticks.
My comments are below in bold.
Information received since the Federal Open Market Committee met in December indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a moderate pace, business fixed investment and exports remain weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2%. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
In the opening paragraph, the Committee gives the 30,000-foot overview of the economic information it’s looked at in the last month since the December rate decision. The unemployment rate is low, and companies are continuing to look for people to hire, so that’s a big plus. Household spending has also been robust, no doubt helped by a strong labor market. However, the Fed would like to see businesses making more investments, and exports are rather below where they would like to see them. The United States tends to run a fairly high trade deficit.
They close opening sentiments by putting a microscope to inflation. Although it sounds counterintuitive at first, the Federal Reserve would ideally like to see more inflation, to a point. By having inflation around the Fed’s target range of 2% per year, it would theoretically encourage Americans to purchase now rather than waiting if prices are expected to go up. This has the effect of stimulating the economy. Unfortunately, inflation has been anemic at best.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1‑1/2 to 1-3/4 percent.The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.
This is the part of the announcement every stock and bond trader or economic analyst skips down to, specifically the part I’ve italicized. The Federal Reserve chose to keep short-term interest rates as they stand right now. This is the tool the Fed uses to try to either goose or lower inflation while at the same time maintaining strong employment numbers and household spending to keep the economy going. The status quo is good for mortgage rates, which have been running on the low side recently.
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 maximum employment objective and its symmetric 2 percent inflation objective. 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 this paragraph, the Federal Reserve gives us a peek at what they expect to analyze in making their next rate decision. They’re going to be looking especially at inflation as they would really like it to be running around 2% in the long term, but they’ll also be looking at employment and business conditions in the U.S. and elsewhere around the globe.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.
For the second consecutive rate decision, the entire committee was in agreement.