federal reserve

What did the Federal Reserve say?

Recent economic data have had a bit of a rosier glow, not that you would know it from reading the monetary policy statement from the Fed's Federal Open Market Committee. That is, unless you know what to look for.

Here's a translation from Fed-speak to English.

What the Fed said

What the Fed meant

FED: Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter. Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources.Translation: Like a lovelorn teenager on the heels of a breakup, the economy has sprung back to life and is getting into the game. Who knows what will happen next, but any movement in the right direction is a good sign. Hey, at least the economy has stopped crying and finally took a shower after the rough winter months. The central bank can't stop harumphing over unemployment; the labor market still can't please the central bank overlords, but it's getting close. If the labor sector would just apply itself, maybe it could use all its resources efficiently.
FED: Like a lovelorn teenager on the heels of a breakup, the economy has sprung back to life and is getting into the game. Who knows what will happen next, but any movement in the right direction is a good sign. Hey, at least the economy has stopped crying and finally took a shower after the rough winter months. The central bank can't stop harumphing over unemployment; the labor market still can't please the central bank overlords, but it's getting close. If the labor sector would just apply itself, maybe it could use all its resources efficiently.Translation: Individuals are spending money. Businesses are feeling pretty good about their prospects for the future, so they are laying out investments in big things like equipment and buildings.

The adverse impact of government spending cuts during the recession is beginning to recede.

By the way, prices are rising. Who knows when or if inflation will hit the 2 percent target the FOMC is aiming for, but now may be a good time to buckle your seat belt.
FED: 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, with labor market indicators and inflation moving toward levels the committee judges consistent with its dual mandate. The committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat.Translation: The twin goals of inflation and full employment fall under the purview of the central bank. As of this meeting, both of these formerly runaway trains seem to be back under the Fed's control. The last monetary policy statement nodded at the risks of a persistently low rate of inflation. What a difference a month makes: Those risks have diminished somewhat. The Fed strikes a tone of vague hopefulness but not quite optimism. That's how it rolls.
FED: 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.Translation: The level of unemployment continues to fall, so the Fed is taking the training wheels off of the economy. It's doing so very slowly so that central bankers can step in and throw more money into the banking system if the ride starts to get wobbly.
FED: Beginning in August, the committee will add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month rather than $15 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month rather than $20 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.Translation: The central bank is still buying billions of dollars of bonds. Next month, the Fed will spend $10 billion less than it did this month, but don't mistake this for tighter monetary policy. Look for interest rates to stay very, very low -- the economy may not be ready for the deep water and can continue to gain confidence in the shallow end of the pool.
FED: 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.Translation: This car could still turn around. Just because quantitative easing is very nearly at the end, the economy could need more help and the FOMC will provide it.
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 committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well-anchored.Translation: This is the part about interest rates, historically the main point of the Fed meeting brouhaha. The fed funds rate is the very short-term interest rate the central bank controls in order to influence inflation and employment. It's the rate at which banks lend money to each other overnight. Those rates are effectively at zero and will stay there as long as possible. Unless inflation heats up.
FED: 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.Translation: What, you think the Fed is going to be stupid about raising interest rates? Increases will depend on inflation and employment. The state of the economy will determine the normal level for interest rates. The fed funds rate could stay targeted at zero for a period of time. After the first rate increase, the neutral rate could stay much lower than the neutral rate has been in the past.
FED: Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Narayana Kocherlakota; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo. Voting against was Charles I. Plosser, who objected to the guidance indicating 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," because such language is time-dependent and does not reflect the considerable economic progress that has been made toward the committee's goals.Translation: Dissent in the ranks! Inflation hawk Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, flashed his talons, mildly as it were. He believes the phrase "considerable time" seems to introduce some uncertainty into the timing of a rate increase, and he also thinks the committee's goals on inflation and employment may be hit sooner than some think.

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