Federal reserve at sunset

It was a big day for stock and bond traders yesterday as the Federal Reserve Open Market Committee (FOMC) announced their rate decision for January. They left short-term interest rates the same after previously raising rates to close out 2018.

Although short-term interest rates are different from longer-term ones for things like mortgages, if short-term rates go up, it’s one factor that plays into the market pricing of their long-term counterparts.

In addition to making the rate decision detailed in the press release below, the committee also announced how it thinks its monetary policy is progressing each January. In a separate statement, the Fed said that it expects to keep an ample supply of bank assets on their books.

This gets complicated, but because many of those assets are mortgage-backed securities (MBS), the Federal Reserve keeping these investments helps mortgage rates remain lower than they might otherwise be.

The bond market reacted positively to this news, and mortgage rates got a little better after the announcement. If you’re in the market for a mortgage, it’s a good time to lock your rate.

I’ve broken down the FOMC press release below. My comments are in bold.

Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier last year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Although market-based measures of inflation compensation have moved lower in recent months, survey-based measures of longer-term inflation expectations are little changed.

As always, this is the report card paragraph where the Fed grades the U.S. economy. Employment gets a solid A-. Jobs are plentiful and unemployment is low. Household spending (spending by people like you and me) is growing nicely and also gets an A-. The Amazon boxes continue to pile up on our porches. Business spending gets a B. Businesses are spending – but not as much as a year ago. And inflation gets a B+. Prices are rising somewhat, but well within the range that makes the Fed happy. Another refrigerator magnet-worthy report!

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.

The Fed combined what used to take two paragraphs into one. I’m all for this language efficiency! This is the money paragraph where the Fed lets the world know the committee is keeping short-term rates the same as they were before. And the FOMC sheds light on some of the data it looks at. Committee members want to keep rates low enough to keep people working, but high enough that prices don’t rise too fast. The last two sentences use a lot of fancy-sounding language to basically say, “We’re going to stick with the status quo for now.”

This made the markets (both stock and bond) happy. Longer-term interest rates dropped and stock prices went up. Win-win.

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.

This is the same paragraph the committee always throw in where it basically says it will review a lot of information (visualize hundreds of people in tailored suits and ties) to make their future decisions. Not sure why the committee feels they need to tell us this. Maybe the FOMC thinks we believe the committee uses the flip of a coin to make trillion-dollar monetary decisions.

Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.

All of the Fed agreed!

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