Federal Reserve Press Release in Plain English 23.0 - Quicken Loans Zing Blog

The Federal Reserve Open Market Committee had an announcement on short-term interest rates and the state of the economy this week. Analysts didn’t expect any waves to be made and the Fed delivered on those expectations.

The Fed chose to keep short-term interest rates where they are for the moment. They’d like to see inflation rising a little bit faster than it is. Although consumers don’t like it, the Fed views a small amount of inflation (the current goal is 2% per year) as a good thing because it stimulates consumer spending by encouraging people to buy now while prices are still as low as they are.

Still, despite the recent storms affecting the South, the Fed thinks the economy is in pretty good shape. Given that, they’ve started to sell some assets they were holding to keep prices low and stimulate the economy. One of the things the Fed is heavily invested in is mortgage bonds. As they begin to sell off their massive portfolio, mortgage rates are likely to rise unless someone steps in and buys a ton of the bonds the Fed is selling.

If you’re in the market for mortgage, this means it’s a great time to lock your rate.

I’ve put together a plain English analysis of the Fed press release below. My comments are in bold.

Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate despite hurricane-related disruptions. Although the hurricanes caused a drop in payroll employment in September, the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business-fixed investment has picked up in recent quarters. Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft. On a 12-month basis, both inflation measures have declined this year 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.

As always, this is the “report card” paragraph. The US economy’s grades are: Labor Market – B+; Household and Business Spending – B; Inflation – C+; Penmanship – A. All in all, not bad. Once again, this report card will go up on the refrigerator.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, 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.

The Fed always reminds us that their job is to balance inflation (price stability) with people working (maximum employment). If the Fed wanted to, it could print money and it wouldn’t take long before everyone had a job. But, prices would spiral out of control and that would end badly. Or, the Fed could suck money out of the economy which would keep prices low (or even make them drop), but unemployment would go through the roof. So, it’s always looking for the Goldilocks outcome to balance the two. The Fed feels pretty good about themselves these days. It sees the economy and job market growing and, even though inflation is lower than it would like to see, it feels pretty good about that, too. 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% to 1.25%. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2% inflation.

Here’s the money paragraph. The Fed didn’t change short-term rates. It believes that rates are historically low and are supporting the economy (that’s what the Committee means by “accommodative”). 

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.

Here the Fed is telling us about the data it looks at in order to determine the state of the economy and make their policy decisions. The committee also reminds us that it thinks short-term rates will rise in the future.

The balance sheet normalization program initiated in October 2017 is proceeding.

“Balance sheet normalization” is a fancy-sounding way to say the Fed is looking to reduce the gigantic (think trillions) amount of Treasury and mortgage bonds it owns. This will likely have the effect of pushing interest rates higher in the coming years.

Voting for the Fed monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Jerome H. Powell; and Randal K. Quarles.

All the Fed agreed! And there was much rejoicing!

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