Federal reserve at sunset

The Federal Reserve had a meeting of its Federal Open Market Committee (FOMC) that concluded Wednesday afternoon. The announcement that short-term interest rates would remain unchanged was widely anticipated.

What the market was really interested in were forward outlook statements about the future of interest rates as well as the Fed’s plans for the large number of assets it owns as a result of a move made after the 2008 economic crisis to stimulate the economy in part through lower interest rates. This meeting didn’t disappoint in either regard.

In addressing short-term interest rates, the Fed made the decision not to project any further interest rate increases for the rest of the year when it released its dot plot – a visual showing where the majority of Federal Reserve members see interest rates going over the next several years. This is important for mortgage rates because, although longer-term rates aren’t directly correlated with short-term rates, as one moves up or down, the other tends to follow to an extent.

The Fed also made an important statement regarding its balance sheet. It probably helps to have a little bit of background here.

In addition to the lowering of interest rates in the wake of the 2008 housing crisis, the Federal Reserve chose to stimulate borrowing by buying a lot of assets in the financial markets and keeping them on their books. Some of the things it bought a ton of were U.S. Treasury securities and mortgage-backed securities (MBS). This had the effect of lowering mortgage rates because when there’s more demand in the market, the return on investment doesn’t have to be as high to attract purchases.

Since October 2017, the Federal Reserve has chosen to end its buying of assets and just let these instruments fall off the balance sheet as they mature. While this might have the effect of increasing borrowing costs for consumers, it gives the Fed room to respond in the event of a further economic upheaval.

While the committee still intends to let its MBS assets leave the balance sheet as they mature, it said it plans to reinvest the revenue in Treasury securities and certain MBS assets beginning in October. The ultimate goal is to conclude the balance sheet reduction for now.

Although these policies will go into effect over a number of months, bond traders did make some immediate moves in the wake of the announcement and mortgage rates did move lower yesterday. If you’re in the market for a mortgage, it’s a good time to lock your rate.

What drives the decisions of committee members? For that, we have to look at the meeting statement. My analysis is below in bold.

Information received since the Federal Open Market Committee met in January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed.

As always, the first paragraph is the report card where the Fed tells us how the economy did over the past few months. It gives the labor market a B+. Jobs are still plentiful, but the economy has slowed a wee bit since late last year. Household spending gets a B. It’s still good (Amazon boxes are still piling up on our porches), but it’s slowed a little. Inflation (price increases) get an A. Inflation is low – and energy prices (you see this at the gas pump) have helped lead the way. All in all, another Dairy Queen report card. Uncle Sam is going to get another banana split for such a happy result.

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 always reminds us what its job goals are (kind of like its performance objectives). The Committee’s job is to find the happy place for short-term rates such that it drives employment up as much as possible without increasing prices too much. The Fed officials are always looking for the “Goldilocks Solution” – not too hot, not too cold. So, it decided to once again keep short-term rates the same. The Committee let the markets know that it “will be patient” going forward – meaning they have no immediate plans to push short-term rates higher. This made the bond market happy. Interest rates dropped right after the announcement. That sound you all heard at 2:15 p.m. yesterday were the collective cheers of U.S. consumers.

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.

They always cut and paste this paragraph into the release. This is where they tell us they will look at a lot of reports and numbers in making their future decisions. It’s good to know someone is keeping an eye on it.

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 the Committee members agreed to keep short-term rates the same!

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