Federal Reserve Press Release Date: March 19, 2014 For immediate release Means Now, Information received since the Federal Open Market Committee met in January indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending and business fixed investment continued to advance, 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 Committees longer-run objective, but longer-term inflation expectations have remained stable. The Fed says here that the economy has slowed down in the last two months. They blame it somewhat on the weather. Looks like the economy has Spring fever too… The Fed continues to pile on saying that: unemployment is too high, spending is too low, and housing could be better. 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 – push the economy so a lot of people are working but don’t push too hard and cause prices to go up too much. The Fed also says here that they want prices of stuff to go up by about 2% a year and they worry if it doesn’t. Why? – the answer is long and boring – stop me sometime and I’ll explain it to you. 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 April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 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 Committees 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 Committees dual mandate. This is the key paragraph. The Fed is cutting back on its monthly purchases of bonds by $10 billion each month. If someone says they are going to buy $10 billion less of something – what will happen to the price of that thing? Yep – it would go down. When bond prices go down – interest rates go up. I snapped a little chart of mortgage bond prices today and posted below in the comments. Can you tell when the Fed made their announcement? 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 Committees 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 Committees decisions about their pace will remain contingent on the Committees outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases. This is where the Fed tells us they will do their job. They will do it by monitoring economic information and by reacting accordingly. Gee – 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 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 Committees 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. In this paragraph, the Fed says they will keep short term interest rates where they have been since December of 2008 – at about 0% to 0.25%. 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. The Fed says here that, when they do decide to start to raise interest rates they will do it cautiously and will try to take a balanced approach. Whew! I was worried they were going to go nuts and take interest rates to 20% all at once! Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Richard W. Fisher; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo. Voting against the action was Narayana Kocherlakota, who supported the sixth paragraph, but believed the fifth paragraph weakens the credibility of the Committees commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity. All did NOT agree. Narayana Kocherlakota (best name ever) thought the paragraph above that starts with, “To support continued progress…” weakens the Committee’s street credibility with the financial markets. The word on the street is that after he said that in the committee room he stood up and dropped the mic and walked out - rapper style. Janet Yellen apparently then said, “Oh no you didn’t…” and stormed out after him. True story. Watching For Your Best Interest, Travis Von Hoopes (408) 314-6478
Posted on: Wed, 19 Mar 2014 20:01:07 +0000