In great news for borrowers, the Fed decided to keep rates where they are – for now, anyway. The Fed has seen moderate growth in the economy, but they still want to take a closer look at events worldwide before deciding the U.S. market can withstand a rise in interest rates to normal levels.
They also decided to keep up the pace of their mortgage bond buying, which is good for those looking to purchase or refinance homes. It keeps rates low.
I’ve made notes on the release below. My comments are in bold.
“Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.”
This is the paragraph where the Fed tells us all how our economy is doing. The Fed sees the economy growing “moderately.” Consumer and business spending is increasing “moderately.” The labor market is seeing “solid gains.” Inflation is lower than they’d like to see – mostly because gasoline prices have been dropping. (Apparently the Fed would be excited if prices at the pump went up!)
“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, 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 but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2% over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.”
Here’s where the Fed tells us that their goal is to balance economic growth with stable prices. Think about it as a scale, with growth on one side and prices on the other. If one side drops, the Fed looks to make changes to the other side to push things back in balance. Here they say prices are being held down because the rest of the world’s economies are messed up – though they say it in a nicer way, “Global economic and financial developments may restrain economic activity and are likely to put further downward pressure on inflation.” (I like my way better.) The Fed also says they expect prices to rise slowly and that they will hit their 2% inflation target “over the medium term.” Not sure what “over the medium term” means. It’s likely somewhere between “yesterday” and “half past never.” Some economists seem to enjoy the world of ambiguity, where it’s hard to be wrong.
“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4% 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% 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 some further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term.”
Here’s the big headline!!! After seven-plus years of leaving short-term rates essentially at 0% – the financial world thought this might be the moment when the Fed was going to push short-term rates up. THEY DID NOT! They then go on to tell us how they will assess the economy and try to figure it all out. Basically, they still aren’t convinced that the world’s economy is strong enough to withstand rising interest rates.
Since the announcement, interest rates have dropped and stocks have gone up. Sweet!
“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.”
The Fed says here that they’ll keep on reinvesting into new mortgage bonds those checks they get when American homeowners make payments on the more than one trillion of mortgages the Fed owns. Think of it as the Fed’s 401k – a really, really big 401k. This little move also keeps mortgage rates low – and that makes us happy.
“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%. 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.”
This is the paragraph where they try to assure us they won’t do something silly when the time comes to raise short-term rates. Thanks, Fed!
“Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.”
All the Fed did not agree! Jeff Lacker wanted the Fed to raise short-term rates.
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