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

It’s Christmas for economic analysts. OK, suspend disbelief and pretend Christmas comes eight times per year. The important thing to remember is that all eyes were on the Federal Open Market Committee this afternoon to see what it would do with short-term interest rates.

The Fed decided that it should keep rates exactly where they are for now. Although there has been progress in the overall growth of the economy, stagnating job gains have convinced the Fed to wait and see before making any further rate hikes.

This is good for those in the market for a mortgage because when short-term interest rates stay low, mortgage rates also tend to stay low. This is a great time to lock in your rate if you’re looking to purchase or refinance.

I’ve broken down all the complicated economic mumbo-jumbo from the Fed’s press release into the simplest terms below. My comments are in bold.

“Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished. Growth in household spending has strengthened. Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

The general skinny is that the Fed thinks the economy is growing nicely, but the increase in jobs being created is slowing down. They also would like prices to rise a bit more (because inflation is like salt – none makes for a bland dish, a little makes it tasty and too much is gross).

“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 strengthen. 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 past declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

They just pretty much cut and paste this paragraph every time. The Fed continues to think the economy will continue to grow and more jobs will be created. And yes, they will continue to monitor economic conditions “closely.” Thanks, Fed!

“Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

This is the paragraph traders around the world went to the instant this release came out. The Fed is leaving short-term rates where they were. When they say, “The stance of monetary policy remains accommodative,” what they mean is they think the low rates are continuing to stimulate the economy. In other words, the Fed still has its foot on the gas pedal.

“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.

That’s a lot of words to say, “We the Fed think short-term rates will remain low for a long time, and when we do increase short-term rates, we’ll do so in little, tiny increments.” But, of course, they leave themselves an out with the last sentence. That’s how economists roll.

“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 owns trillions of dollars of Treasury and mortgage bonds. As those bonds pay back principal, the Fed is continuing to reinvest that principal into more Treasury and mortgage bonds. That makes mortgage bankers very happy because it keeps mortgage rates lower than they would be if the Fed didn’t do this. 

“Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo.”

All the Fed agreed and voted to support keeping short-term rates where they are.

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