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

The Federal Reserve feels the economy is improving. It’s not as much as they would like to see in the long term, but it was enough to raise short-term interest rates 0.25%.

In the immediate aftermath of the announcement, mortgage rates are up slightly despite the fact that the markets expected this. This continues the upward trend mortgage rates have been on since the election. If you have any plans to buy a home or refinance anytime soon, it’s probably an excellent time to lock your rate. No one knows exactly where mortgage rates are headed on any given day, but lately they’ve been mostly climbing.

I break down the econo-speak from the Federal Reserve Press Release below. My comments are in bold.

“Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year. Job gains have been solid in recent months and the unemployment rate has declined. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased since earlier this year but is still 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 have moved up considerably but still are low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.”

This is the “economic recap” paragraph where the Fed lets us know how they think the economy is doing. Again, they give the U.S. economy a solid B+. They give high marks for falling unemployment and increased spending by households (people like you and me). They give lower grades for business investment (like businesses building a plant or adding machines). They see inflation as rising but still lower than their goal. If you brought this report card home to your parents, you’d definitely get a trip to the ice cream shop, but you probably wouldn’t get a banana split.

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected 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 appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.”

This is where the Fed tells us what their mission is: to balance the most people working while not causing prices to rise too much. The Fed continues to think these two things are largely in balance. They see the economy growing and they see inflation (prices) rising – but not so fast as to make them nauseous.

“In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.”

As always, this is the paragraph that gets everyone excited. The Fed did what everyone expected and moved short-term rates up 0.25%. This is only the second time in 10 years that they’ve pushed short-term rates higher. The Fed still thinks monetary policy is accommodative, which, in English, means that the Fed thinks rates are still low enough to push people to borrow and spend and thereby stimulate the economy.

“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 describes how much work they will do as they consider what changes to make in the future. The Fed thinks future increases will still be “gradual,” but the markets are perceiving this statement to mean there’s a larger bias toward pushing rates higher than in past statements. Mortgage rates have moved higher (not a lot, but some) as a result of this announcement.

“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 paragraph is the same as in past releases. The Fed says they will take the principal payments they get from the trillion or so dollars of mortgages they hold and will reinvest that money into new mortgage bonds. That keeps mortgage rates lower than they would otherwise be and makes home buyers and people looking to refinance happy.

“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! It’s been a while since that occurred. You can almost feel the love in the room.

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