The Federal Reserve kept short-term interest rates the same today. Once investors get past that headline, they start reading the tealeaves, parsing every word in the statement for some indication of what’s coming next.
Any time the Federal Reserve says anything, they have the chance to create a market movement. Today, a couple of minor language changes around inflation is making people think inflation isn’t meeting the Fed’s expectations. This caused money to flow to the safety of bonds and mortgage rates improved a bit.
I’ve put a plain-English analysis of the announcement together. My comments are in bold below.
Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2%. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
This is the “report card” paragraph where the Fed tells us how the U.S. economy did this semester. The Fed gave the economy a B+ for job growth and unemployment, a solid B for household spending (the amount of money we spend on stuff), and a C for inflation. Oddly, the C for inflation isn’t because prices are rising too fast – but rather because they aren’t rising as fast as the Fed would like. Why would the Fed like to see prices rise a bit more? Because that would indicate economic growth (because demand for stuff is rising, so businesses can raise prices). All in all, it’s a solid report card. This one goes up on the refrigerator!
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect 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 on a 12-month basis is expected to remain somewhat below 2% in the near term but to stabilize around the Committee’s 2% objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
This is the “crystal ball” paragraph where the Fed takes a look into the future and tells us what they see. They’re telling us they see the economy growing gradually, more jobs being created and inflation (price increases) staying low.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4%. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2% inflation.
This is the paragraph the world’s bond financial traders scrolled down to read first. The Fed kept short term rates the same. This surprised no one. The Fed still thinks they have their foot on the gas pedal, meaning they think short term rates are low enough that it’s inspiring people to borrow, invest, spend and grow the economy. (Someday, the Fed will be more worried the economy is growing too fast or that inflation is rising too fast – and then they’ll push rates higher, which will reverse the “borrow, invest, spend” cycle).
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% 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. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant 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.
This is where the Fed tells us they will watch the economy closely, read a lot of reports, monitor inflation rates, etc. They also tell us they are going to keep raising short term rates – but really carefully – like banking ninjas.
For the time being, 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. The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.
The Fed drops this line on us: “The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided the economy evolves broadly as anticipated.” This essentially says, “We’re going to reduce debt, sort of relatively soon, maybe, and only if, hopefully, the economy gets better, we hope, fingers crossed.” Next time someone asks you if you’re going to reduce your credit card debt, tell them, “Yes, I’m going to be implementing a balance sheet normalization program relatively soon, provided my lottery numbers hit…”
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Bill Banfield; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.
All the Fed agreed! Even Neel Kashkari went along with the group (He’s been a bit of a rebel as of late and has been voting “no.”).
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