Federal Reserve - Quicken Loans Zing Blog

Bob Walters is the Chief Economist and Vice President of the Capital Markets Group at Quicken Loans. 

The Federal Open Market Committee met this week and not much changed since the last meeting. The economy continues to slowly recover (slowly, as in SLOWLY), and the Fed continues to stress out a little about unemployment. And just like last time, they iterated they absolutely want to keep inflation at 2% a year. Two is the magic number. Any lower and we head into the dreaded zone of deflation and things get really ugly really quickly for the economy and for all of us.

And just like last meeting, the Fed is cutting back AGAIN on monthly bond purchases by another $10 billion a month. This had to happen eventually. Don’t forget, not that long ago, the Fed didn’t buy any mortgage bonds. This “taper” of mortgage bond purchases could have an effect on mortgage rates. My recommendation to anyone thinking of refinancing or buying a home is not to wait too long or you might be staring at rates higher than today.

With all that said, here’s the full Fed Release in plain English. My comments are in bold. As always, let me know if you have any questions. I love answering them.

Information received since the Federal Open Market Committee met in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending appears to be rising more quickly. Business fixed investment edged down, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.

The Federal Open Market Committee (FOMC) is a group of folks who are chosen from one of the 12 Federal Reserve Banks across our great land. This committee of fun-loving economists meets eight times a year to decide how much fuel to put in the U.S. economy’s tank. If they want to speed up the economy, they put more fuel (money) in. If they want to slow it down, they pull out a squeegee and suck fuel (money) out of the tank.

In the paragraph above, the Fedsters tell us that the economy is slooooowly getting better. Unemployment is still too high. People seem to be spending more. They also question other branches of the government (“Fiscal policy is restraining economic growth…”). 

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 and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

This is the paragraph where the Fed tells us what their job description is. They try to keep people employed while not causing inflation. And they also remind us that they want prices to rise by 2% a year. Why, you ask? Good question. When prices are super low – or even falling – people often will delay purchasing things (I mean, if the price is going to fall, why not wait?). That’s bad for an economy because a lot of people waiting to buy stuff means few people are buying things now, which means less people are needed to make stuff, which means less people have jobs, which means less people have money, which means less people are buying stuff, which means prices fall more – and an economic death spiral ensues. 

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in May, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $20 billion per month rather than $25 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $25 billion per month rather than $30 billion per month. 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. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

Taper alert! Once again, the Fed is going to buy $10 billion less of mortgage and Treasury bonds each month. Not too many years ago (three or four), the Fed bought ZERO mortgage or Treasury bonds. They only started to do so to drive down long-term interest rates so people would do stuff like refinance and borrow to hire people. That action is called “monetary easing.” They are now slowing their roll because they don’t think the economy needs their help as much as it did a few years ago.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

Yep – the “We’re going to do our job,” paragraph is back. This is like your pilot coming on before takeoff saying, “The pilots will closely monitor the instruments and weather during the flight and we will continue to fly the plane until we land.” Also, in the last sentence, they use the word “efficacy.” Here’s a challenge for you: Look up the word “efficacy” and use it in a sentence with someone at least three times today. People will think you’re super cool. It may also help you if you play Scrabble someday. You’re welcome.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, 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 developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

The four magic words in this paragraph are “for a considerable time.” What question do those four words answer? This one:  “Yo Fed – how long you going to keep short-term interest rates low?”

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.

This paragraph has been in past statements as well. Love it. The Fed says here that when they do start to raise short-term rates, they will do so reasonably and with great consideration and thought. 

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Richard W. Fisher; Narayana Kocherlakota; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo.

All the Fed agreed! That’s actually news because at least one of them has voted against in recent memory. The Fed must be bonding lately.

That’s it, friends. See you next time the Fed meets!

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