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Translating what the Fed said

The Federal Reserve's rate-setting committee meets eight times per year. Each time, the panel issues a monetary policy statement, which does a number of things: It describes the latest interest-rate stance, explains why the Fed came up with that policy, and gives a brief assessment of the economy. In case the wording isn't clear, here's a translation of what the Fed said, and what it meant.

What the Fed saidWhat the Fed meant
FED: Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term.Translation: The economy is recovering even slower than it was earlier this year. Consumers are spending more, but they're held back by high unemployment, modest raises, falling property values and stingy creditors. Businesses are spending more on equipment and hardware, but those spending increases are happening at a lower rate than earlier this year. Employers are reluctant to hire, housing starts are depressed and banks are lending less. The Fed believes all of these conditions will improve gradually, with low inflation -- but the emphasis is on the word "gradually."
FED: Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.Translation: Inflation can get too low, leading to higher-than-necessary unemployment. The Fed believes inflation is at this point -- a little below optimal. With unemployment running high, and longer-term inflation expectations stable, inflation is likely to remain at this below-optimal level for some time.
FED: The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.Translation: The federal funds rate will remain in a range between zero percent and 0.25 percent. It's likely to remain there for a few months, because inflation is expected to remain low for an extended period. The Fed will continue to buy Treasury notes to offset paid-off mortgage holdings and matured Treasury holdings.
FED: The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.Translation: If the Fed comes to believe that another round of quantitative easing is needed -- in which the Fed would buy billions of dollars' worth of bonds -- the central bank will do that. It's not deemed necessary right now.
FED: Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.Translation: All but one member of the panel voted for the policy outlined above.
FED: Voting against the policy was Thomas M. Hoenig, who judged that the economy continues to recover at a moderate pace. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and will lead to future imbalances that undermine stable long-run growth. In addition, given economic and financial conditions, Mr. Hoenig did not believe that continuing to reinvest principal payments from its securities holdings was required to support the Committee's policy objectivesTranslation: Committee member Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, dissented from the rate policy. He believes the Fed shouldn't promise to keep the federal funds rate low "for an extended period" because it will lead to imbalances that undermine long-term economic growth. He also doesn't believe the Fed needs to keep reinvesting money into Treasury securities

 

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