Federal reserve at sunset

The Federal Reserve’s first meeting led by new chairman Jerome Powell came to a close Wednesday. The Fed’s Open Market Committee voted to raise short-term interest rates by 0.25% to a range of 1.50% – 1.75%. The market had pretty much seen this coming, so mortgage rates didn’t see any wild swings.

With that being said, it’s worthwhile to note that the Federal Reserve has forecasted two more increases for short-term interest rates coming this year. Although there’s no direct link between short-term rates and the longer term rates seen on mortgages, over time, as these rates rise, mortgage rates do tend to go up as well. They’ve been on the rise lately. If you’re looking to buy or refinance your home in the near future and you see an attractive rate, don’t hesitate to jump on it.

In addition to the rate increase everyone had been expecting, the statement also included the committee’s assessment of the overall health of the economy. Although there may be a new chairman in town, these press releases are written in the same old Fed-ese. In the spirit of simplifying the complex, I’ve written a plain English analysis of the announcement.

My comments are in bold below.

Information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

This is the report card paragraph. Little Sammy (his friends call him Uncle Sam) got pretty good marks this semester. Unemployment is low, families and businesses are spending more dough, and inflation (price increases) are still below the Fed’s expectations. Gold star for Sammy!

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

The job of the Fed is to balance jobs and prices (it wants lots of jobs without lots of inflation). The Fed suggests that it can continue to raise short-term rates “gradually” and that the economy will still expand “at a moderate pace in the medium term.” (What the heck does that mean? Is that like finding the middle of the middle?) In the last sentence, the Fed lets us know that it feels like jobs and prices are in balance, but the committee reassures us by letting us know that it’s “monitoring inflation developments closely.” Thanks, Fed!

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 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

This is the “money paragraph” that traders, business people and economists fast-forwarded to. The Fed increased short-term rates (the one they control is called the “Federal Funds Rate”) by 0.25% to 1.75%. This is the sixth 0.25% increase the Fed has made over the past few years. But rates are still very low. To put it in perspective, I’ve added a graph (free of charge to you) showing where the Fed Funds Rate has been since the early 1970s. It’s still super, super low.

(Aly: add screenshot of federal funds rate for March 2018. Source: St. Louis Fed)

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. 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 further 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 data that it looks at. Here’s the bottom line: The committee looks at a lot of stuff and crunches a lot of numbers and then put together fancy phrases like “relative to its symmetric inflation goal” to sound sophisticated. But don’t worry, Fed – we trust you. We think you’re plenty smart. 

Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.

All the Fed members agreed!

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This Post Has 4 Comments

  1. “it’s worthwhile to note that the Federal Reserve has forecasted three more increases for short-term interest rates coming this year. If you’re looking to buy or refinance your home in the near future and you see an attractive rate, don’t hesitate to jump on it.”

    Two problems. First the Federal Reserve does not forecast rate increases. In publishes the opinions of the Federal Open Market Committee participants as to what each individual believes will be an appropriate rate at the end of the year. At the latest meeting the median projection was for the rate range to be 0.5% higher than the rate range set at the meeting which would be two, not three, more .25% increases. Of the fifteen participants, two said the end of the year rate should be where it is now, six said 0.5% higher, another six, 0.75% higher and one, 1% higher, but only eight of the fifteen participants vote on rate changes and there is no way of knowing which opinions belonged to the voters.

    Second there is no strong link between that overnight rate for which the FOMC sets its target range and mortgage rates. Just before the committee raised the fed funds rate target range from 0 to 0.25% in December 2015 the average 30-year mortgage rate, as reported by Freddie Mac, was 3.97%. After the fifth increase to 1.25 to 1.50% in December 2017 the 30-year mortgage rate was 3.99%. In between, the mortgage rate declined to 3.41% in July 2016. This year the mortgage rate has been rising and was at 4.44% in the week ending March 15. There is a strong link between the federal funds rate and rates on bank loans including credit cards. Banks set what they call the “prime rate”, which once upon a time was the rate they charged their best commercial customers, at 3% above the top of the federal funds target range. Many U.S. credit cards and other consumer loans are indexed to the prime rate as are most commercial loans.

    1. Hi Dink:

      We did misspeak about the prediction dot plot from the Federal Reserve. Three short-term interest rate increases were projected for 2018. As you rightly point out though, that includes the increase from Wednesday. I’ve gone ahead and made the change so that now says two. In terms of the relationship between short-term rates and long-term rates, it wasn’t our intention to imply that there’s any kind of direct correlation. We merely meant to say that as short-term rates go up, long-term rates have a historical tendency to rise as well. I’ve made slight modifications to the language. Thanks for sharing your insights with us. Have a great day!

      Thanks,
      Kevin Graham

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