Federal Reserve Press Release In Plain English – December 2019The Federal Reserve announced its decision on short-term interest rates following a 2-day meeting that concluded yesterday. As was widely expected in the market, short-term interest rates remained unchanged to end the year. However, this meeting was more closely looked at for signs of forward guidance for the future.
The Federal Open Market Committee is responsible for setting the direction of short-term interest rates, which are the rates at which banks borrow funds overnight. Although it may not sound like it, the short-term rates have a correlation with long-term rates for things like mortgages because borrowing costs for all sorts of loans go up or down for consumers based on the cost to lenders, among other factors.
The Fed meets eight times a year to set these rates. However, four of these meetings are extra special because projections are released on where officials see interest rates headed in the future. At yesterday’s meeting, the Federal Reserve telegraphed that short-term rates weren’t expected to change in 2020, based on median projections.
Although the Fed isn’t anticipating changes in interest rates, there are plenty of market factors still at play that could move things around in the near future. The trade situation with the Chinese still remains in the headlines on a daily basis and Brexit continues to be another major motivator of global economic uncertainty. Traders feel more comfortable when there are indications of what’s going to happen. Increasing questions sometimes lead to reactions based on the news of the moment. This can cause investment dollars – including those underlying mortgage rates in the bond market – to move in one direction or the other.
The bottom line is that mortgage rates are in a really good spot right now. If you have clients who are getting ready to purchase or refinance, locking their rate now is worth considering.
The press release is below. My comments are in bold.
Information received since the Federal Open Market Committee met in October indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12 month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
In the first paragraph, the Fed likes to give an overview of the state of the economy headed into the decision. If this was a report card, employment gets an A. The unemployment rate has been hovering right around all-time lows. Consumers are feeling pretty good about the economy because household spending has been accelerating rather quickly. However, the Fed would certainly like to see business investment and exports to other countries go up faster than they have been. Inflation is also running quite a bit lower than the Fed would hope. Basically, if prices go up a little bit, people are more likely to buy now than wait for the future, which helps keep the economy humming.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1 1/2 to 1-3/4 percent. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.
I’ve italicized the portion of this release that every market participant’s eyes are drawn to when they look at this statement. The Committee decided it was going to keep the federal funds rate that affect short-term interest rates the same. It says that any future movements will depend on what’s happening across the world and the pace of future price increases. The Committee thinks that keeping rates the way they are for now will help maintain the economic expansion we’ve been in for about a decade now.
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 maximum employment objective and its symmetric 2 percent inflation objective. 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.
Essentially, the Federal Reserve says it’s going to pay attention to lots of economic data around employment and price data as well as consumer expectations about where prices are going to go in the future. Global developments affecting markets are also going to be watched closely. It’s good to know someone is crunching the data.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.
All Committee members were in agreement. This hasn’t been a given recently, so it’s interesting to see the cohesion of opinions.