The Federal Reserve chose to leave short-term interest rates unchanged. Bond and stock market participants shrugged, and nothing changed as far as mortgage rates in the immediate aftermath of the announcement.
If you’re in the market for a mortgage, rates are in a pretty good spot right now, and it’s a good time to lock your rate ahead of tomorrow’s employment report, which always has the potential to move things around based on the data it contains.
The announcement may have been ho-hum, but it’s just as important to determine how the committee got there if you’re trying to see what it really thinks about the economy. I put an analysis of yesterday’s announcement below. My comments are in bold.
Information received since the Federal Open Market Committee met in March indicates that the labor market remains strong and that economic activity rose at a solid rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Growth of household spending and business fixed investment slowed in the first quarter. On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2%. 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.
This Fed statement is a lot shorter than they’ve been in the past. Maybe the committee is getting bored. This first paragraph, as always, is the report card paragraph. The Fed gives Uncle Sam an A for employment. Jobs are plentiful and unemployment is low. Americans are happy. People who run fast-food restaurants are not (hard to get people to flip burgers when higher paying jobs are readily available). Spending by households (people like you and I) and businesses gets a B-. That spending slowed a bit in the January to March timeframe. And inflation (price increases) gets a B+. Inflation remains low – which is good – but the Fed wouldn’t mind a little bit more inflation. Why? Because it turns out that if prices are rising, people are more likely to spend now (because they know buying something in the future will be a bit more expensive). When prices are flat or even falling (deflation), people put off spending – and that’s generally bad for an economy. (There you go – you now understand about 75% of everything I learned in Econ 101 in college.)
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 2.25% to 2.5%. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% 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.
This is the money paragraph. I italicized the part that the world’s financial traders looked at first when this release came out. The Fed decided to keep short-term rates the same as they were before. Consistent with its “no change” policy, the world’s financial markets (both stocks and bonds) gave the announcement a resounding YAWN – and prices of bonds and stocks didn’t budge. The Fed also reminded us that it will be patient as they watch what the future brings. Am I the only one who finds it odd that the committee feels it necessary to tell us it will be patient? Did we think committee members would drink too much coffee one day and just go nuts?
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.
In this paragraph, the Fed walks us through its decision-making process. It says that, as it pertains to future rate increases or decreases, the Fed will read a lot of stuff, look at a lot of numbers, calculate a bunch of calculations and generally do economist-type stuff. While market participants know this stuff, it’s nice to have a reminder that someone is looking out.
Voting for the FOMC monetary policy action were: Jerome H. Powell, Chair; John C. Williams, Vice Chair; 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 Fed agreed!
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