Federal Reserve - Quicken Loans Zing Blog

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

New verse, same as the first? That’s what this meeting felt like. Everything the Fed discussed is almost identical with what they discussed in their last meeting.

The Federal Reserve met yesterday for the final time with Chairman Bernanke and the news was mixed (sound familiar?). Unemployment is continuing to improve but still higher than the Fed is comfortable with. And inflation remains below the Fed’s comfort zone but, as was the case in the last meeting, they hold an optimistic outlook for the long term.

The big news this month was a continuation of the slow weaning-off of the buying of Treasury bonds to keep long-term rates down. The Fed is reducing their monthly mortgage and Treasury bonds buying by $5 billion each. The good news is that the markets had expected this and mortgage rates held their own.

Enough of this. Let’s get to the release. Here it is – yesterday’s Federal Reserve Release in plain English (my commentary is in bold).

Information received since the Federal Open Market Committee met in December indicates that growth in economic activity picked up in recent quarters. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate declined but remains elevated. Household spending and business fixed investment advanced more quickly in recent months, while the recovery in the housing sector slowed somewhat. 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.

Once again, the Fed leads with the, “yeah, but” paragraph. Labor markets are still iffy, but showing improvement. Unemployment’s down, but higher than usual. Inflation’s lower than they want, but longer-term things look okay.

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 the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more 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 everyone what their job responsibilities are: They exist to try to push the economy higher while keeping prices stable. They think they’re getting closer to maintaining that balance. Nice job Fed!

Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases.

Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 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.

This paragraph is the big enchilada, the grande burrito, the super nacho (mmm … nachos). The line I highlighted is the one traders around the world scurried to find as soon as the press release came out. The Fed says here that they’re going to again reduce the amount of Treasury bonds and mortgage bonds they buy each month by $5 billion in each category. Remember – they’re buying these bonds to push the prices of those bonds higher, which lowers the rates. They want to push long-term rates down so more people will do stuff like refinance, so people have more money in their pockets which they’ll spend, which will cause businesses to make more stuff, which will require businesses to hire more people, which pushes the economy higher.

 Because this was largely expected, we aren’t seeing much change in the bond market (which means interest rates won’t change much). However, the stock market obviously saw this as another opportunity to sell off as stock prices are down quite a bit.

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.

As always, this is the paragraph where the Fed says they will “closely monitor incoming information and employ its policy tools as appropriate, until things get better.” Thanks Fed!

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional 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 well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal. 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 Fed says here that they remain committed to keeping the pedal to the metal as far as low, short-term rates go. As long as the unemployment rate is above 6.5%, they’ll keep short-term rates low. It’s 6.7% now.

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

Breaking news! All the Fed agreed! They all voted for today’s changes. 

I’ll end this with a big Goodbye to Ben Bernanke!

This was Ben’s last meeting as Chairman of the Federal Reserve.

Ben ran the Fed since February 1, 2006 when he was appointed to the position by President Bush. President Obama nominated him for a second term in 2009. He ran the Fed in one of the most dangerous and difficult economic times in our country’s history, during which we worked through the financial crisis of the past five years.

History will judge whether he did a good job or not, but I do know we’re all going to miss his super sweet beard.

Peace out Ben – and all the best!



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