The Federal Reserve had a big meeting today, and they said they’re happy with the progress of the economy in general.
Although interest rates are currently low, the Fed perceives that the economy is beginning to stabilize, which means the Fed could start pushing the federal funds rate up to normal levels soon. This essentially means that the cost of borrowing is going to go up for banks. That cost is passed on to consumers in the form of higher interest rates. Most expect rates to rise later this year.
Check out my plain English version of the announcement. My comments are in bold.
Information received since the Federal Open Market Committee met in April suggests that economic activity has been expanding moderately after having changed little during the first quarter. The pace of job gains picked up while the unemployment rate remained steady. On balance, a range of labor market indicators suggests that underutilization of labor resources diminished somewhat. Growth in household spending has been moderate and the housing sector has shown some improvement; however, business fixed investment and net exports stayed soft. Inflation continued to run below the Committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports; energy prices appear to have stabilized. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
I like to call this first paragraph the “report card” paragraph. This is where the Fed takes a look back at things that have happened since the last time they met (a few months ago). So – what’s the report card grade this time? I’d say the Fed is giving the U.S. economy a solid B+. They like that the unemployment rate continues to drop. They like that consumers are spending more dough these days. They did mark down businesses for spending less and they worry that inflation is less than what the Fed wants it to be (2%). So, all that, plus good marks for penmanship, and it’s a report card any superpower economy would be happy to take home to show mom and dad.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
This is where the Fed reminds you that they try to balance people working against prices rising. Right now they think that balance is, well, balanced. They expect prices to rise to a 2% annual increase level (and they like that). They also tell us they will monitor inflation (price increases) closely. Thanks, Fed!
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress – both realized and expected – toward 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 anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
This is the paragraph where the Fed tell us what they are going to do. They tell us that they will keep short-term rates at the same super low levels (between 0% and 0.25%) that they’ve been at since December of 2008. They tell us that they will look at lots-o-data to determine when they think the magical employment/inflation mix is just right for them to start raising short term rates. Most folks think that will be sometime later this year.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
This is kind of a nerdy-inside-baseball sort of paragraph for people who care about some of the “plumbing” things regarding how the Fed does their business. The Fed says here it will continue to reinvest the principal payments it gets from the trillion dollars or so of mortgages they hold, back into more mortgages. They know this will tend to keep mortgage rates lower than they would be if they didn’t do this. And for that, Fed, – we love you.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Here’s the “We won’t go crazy” paragraph. They remind us that when it comes time to raise short-term rates (“remove policy accommodation” in their language), they will do it gradually rather than in some kind of maniacal fashion. They also say that we should expect short term rates to stay low for a good long time. Sweet.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.
All the Fed agreed! They all voted to keep rates at these super low levels.
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