Federal Reserve Press Release In Plain English – January 2020When the Federal Reserve’s Federal Open Market Committee met last Wednesday, it decided to leave short-term interest rates the same. As you likely remember, although not a one-to-one correlation, longer term rates for things like mortgages tend to follow the general trend of the federal funds rate that the Committee controls. Revolving accounts, including credit cards, are usually in harmony with this short-term rate because the interest rate can change on a monthly basis.
After the meeting, observers noted that the Fed seemed to indicate a desire for higher inflation. Consumer spending was also only viewed as rising at a moderate pace in comparison to a strong growth rate at the end of last year. Part of that could be a cooling after the holidays, but it’s something to be aware of.
For observers of interest rates, mortgage rates have generally been moving lower recently, and nothing about this press release looks like it would change that current environment. It’s a good time to be helping your clients!
My comments are below in bold.
Information received since the Federal Open Market Committee met in December 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 moderate 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%. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
In the opening of the statement, the Committee gives a high-level summary of the economic information it has looked at in the last month since the December meeting. The unemployment rate is low, and companies continue to add to their payroll, so that’s a big plus. Household spending has also been robust, no doubt boosted by strong employment levels. However, the Fed would like to see businesses making more investments, and exports are rather below where the Committee would like to see them. The United States tends to run a significant trade deficit.
The Committee continues by putting a magnifying glass to inflation. Although it seems weird when you first hear it, the Federal Reserve would love to see more inflation, to an extent. By keeping inflation near or even slightly above the Fed’s target range of 2% per year, it would likely encourage Americans to purchase now rather than wait if prices are expected to go up. This has the effect of boosting economic activity. Unfortunately, inflation data has been weak at best.
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 returning to 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.
This is the part of the announcement every stock and bond trader or economic analyst worth their salt looks for immediately, specifically the part I’ve italicized. The Committee chose to keep short-term interest rates flat at their current levels. This is the tool the Fed uses to try to either raise or drive down inflation while at the same time maintain healthy employment numbers and household spending to keep the economy going. This steady-as-she-goes policy is good for mortgage rates, which have been trending lower in recent weeks.
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.
In this paragraph, the voting Fed governors peel back the curtain on what they’ll be looking at in making their next rate decision. They’re going to be focused on inflation as they would really like it to be running around 2% for the long run, but they’ll also be looking at employment and business conditions in the U.S. and internationally.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.
For the second time in as many months, the whole committee voted for this policy action.