Federal reserve at sunset

The Federal Reserve left short-term interest rates exactly where they were last time the committee met in March. I’ll get that out of the way.

The rest of the Fed’s report paints a picture of an economy that’s in pretty good shape. It’s widely expected that the Federal Reserve will raise short-term interest rates in June, and this report does nothing to change that assumption.

While longer-term rates like those given to mortgages aren’t directly related to these short-term rates, there does tend to be a correlation between the two. If you happen to be in the market to buy a new home or refinance your existing one, it might make sense to lock a rate you like.

I’ve analyzed the announcement below. My comments are in bold.

Information received since the Federal Open Market Committee met in March 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, on average, in recent months, and the unemployment rate has stayed low. Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace, while business fixed investment continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

As always, this first paragraph is the “report card” paragraph. Uncle Sammy is showing improvement in class. Sammy gets a B+ for job growth and unemployment, a B- for household spending (money that average Joes and Josephines like you and me spend) and an A- for business spending.

Inflation (price increases) is moving closer to a 2% number – which is the Fed’s target. The Fed doesn’t seem too worried because compensation inflation (wage growth) isn’t out of control. Wage inflation is often the scariest kind – because, while it’s easy to cut the price of a sweater or a lawn mower – it’s almost impossible to reduce people’s wages, so once wage inflation takes hold, it’s hard to control.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. 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 run near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.

Here’s where the Fed gives us its “why.” The Fed exists to balance job growth and stable prices. The committee thinks the economy will keep growing “moderately” and it thinks inflation is under control. Way to go, Fed!

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 1-1/2 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.” The Fed kept short-term rates (the Federal Funds Rate) the same. It thinks rates are low enough (“accommodative”) that they are still pushing the economy along. In other words, the Fed is saying its foot is still on the accelerator – not the brake.

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.

Since the Fed just took the temperature of the economy, this is the paragraph where it tells us what makes the thermometer rise. Bottom line: It looks at lots of stuff, carefully monitors it and crosses its fingers really hard.

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 agreed!  Nobody had to be voted off the island.

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