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

The Federal Reserve had a meeting today, and despite the fact that the economy is improving, they decided not to raise short-term interest rates.

Put simply, this is good news for those in the market for a mortgage because it means rates will remain low for at least a little while longer. Woo hoo!

My analysis goes a little bit deeper than a mortgage consumer happy dance. I’ve included my comments on the Federal Reserve statement in bold.

Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months. Household spending has been growing strongly 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 remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

The Fed has a little pep in their step. They like what they see when they look at the U.S. economy right now. They see less unemployment and more economic activity (stuff being made and services being provided). They were happy to see June’s strong employment number after the bummer we saw in May. And they see inflation (rising prices) as being unusually low. (This is big – because low price growth generally means low interest rates).

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. Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Remember, the Fed’s job is to try to balance inflation (not too much or too little) and job growth (more is better). Here, they tell us they aren’t worried about inflation, and they think more jobs will be created in the near future. In other words, they’re getting close to their happy place.

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.

Given that the Fed is near their happy place, and given that they still would like to see a bit more inflation and more job growth, they kept their foot on the accelerator (kept short term rates super low). The Fed Funds Rate (the rate at which banks can borrow from each other) remains at 0.50%. Mortgage rates went down a little bit with this news. That puts us in our happy place.

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.

Here’s where the Fed tells us the indicators they look at in making their decisions. They’ll watch jobs, inflation and other data to decide whether or not to raise short term rates in the future. Sweet.

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.

This is the paragraph that sounds boring, but it’s important to someone in the market for a mortgage. The Fed owns more than a trillion dollars of mortgage bonds. Those bonds pay interest and principal every month. The Fed is reinvesting the principal repayments they get back into mortgage bonds. That keeps mortgage bond prices higher than they normally would be, which keeps mortgage rates lower than they normally would be (in Fed-speak, they call this “maintaining accommodative financial conditions.”) Thanks, Fed!

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 1/2 to 3/4 percent.

All the Fed did NOT agree! Esther George wanted to raise short term rates by 0.25%. 

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