The Federal Reserve had its September meeting the last two days and they chose to leave short-term interest rates right where they stand. That was more or less expected.
The real water cooler gossip capturing the attention of most economic analysts is what the Fed would do in order to reduce the amount of assets on its balance sheet. This is important for many areas of finance, including mortgages. Almost a decade ago now, when the economy was in pretty rough shape, the Federal Reserve decided to help stimulate the economy by buying massive amounts of assets, including a ton of mortgage bonds in order to keep rates low.
The Federal Reserve is the biggest purchaser of mortgage bonds in the market right now. When they start selling those bonds, it’s reasonable to assume yields will have to go up in order to attract other buyers. When that happens, rates may go up. As of right now, the Fed plans to start selling some of these assets in October.
Fed officials have said they will be careful with the program so as not to cause any market shocks, but if you’re thinking of buying a house or refinancing right now, rates are looking really good. If you see a deal you like, don’t hesitate to lock your rate.
The Fed specializes in speaking in “econo language,” so I put my plain English analysis of what they told us today in bold below.
Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have remained solid in recent months, and the unemployment rate has stayed low. Household spending has been expanding at a moderate rate, and growth in business-fixed investment has picked up in recent quarters. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
This is the “report card” paragraph where the teacher (the Fed) grades the student (U.S. Economy). The Fed gives the U.S. Economy pretty good grades this time. The labor market is rising nicely this year
- A-minus: Household spending (what you and I spend on stuff) as well as business spending is also growing
- B+: Inflation (prices of stuff) have declined (which, oddly, bums the Fed out a bit)
- In all, the U.S. economy gets a solid B and should go up on the refrigerator.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricanes Harvey, Irma and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity 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. Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but 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.
This is where the Fed guestimates what it thinks will happen in the economy in the near future. The Fed mentioned the recent hurricanes having an effect on the economy. The committee sees the economy continuing to do well, although it sees rising gasoline prices (caused by the disruptions in Texas from Hurricane Harvey) increasing inflation some. Bottom line – the Fed feels pretty good about the balance between growth of the economy and prices.
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 1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
This is the “money paragraph.” This is where the Fed announced it isn’t changing short term rates. Yay.
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 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.
This is where the Fed tells us the types of things the committee looks at. It will decide whether it will increase short term rates (federal funds rate), based on employment and inflation. The committee wants to target a 2% inflation rate (we’re below that right now). The Fed says it thinks the future will bring “gradual increases” in short term rates. That’s generally good news for both the economy and mortgage rates. Nice.
In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.
“Balance sheet normalization program” means the Fed is trying to find ways to reduce the giant amount of mortgage bonds and longer term treasury bonds that it purchased during the financial crisis to drive longer term rates down. This plan (feel free to Google it if you need a sleep aid) kicks off in October.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.
All the Fed agreed!
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