federal reserve

What did the Federal Reserve say?

The suspense is over. The first monetary policy statement from the Janet Yellen-led Federal Reserve is out and it sounds familiar. The statement hit all the usual notes about the economy, unemployment and inflation, but a few key elements were changed, just as everyone suspected they might be.

What were the words that had everyone in the financial world on the edge of their seats this week?

What the Fed said

What the Fed meant

FED: 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 Committee's longer-run objective, but longer-term inflation expectations have remained stable.Translation: It was a long, cold winter and the economic data is still thawing. Unemployment improved, but too many people are still out of a job. People and businesses spent money, but not enough was spent buying new homes. The emphasis on cutting spending by the federal government has hampered economic growth, but increasingly less so.

Inflation is lower than we would prefer, but we think it will pick up over the long term: Two years from now or 20, who knows?
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 and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate.Translation: The economic levers pulled by the Federal Open Market Committee control the level of employment and inflation basically by controlling the flow of money. With interest rates set to maximum growth plus billions of dollars of bond purchases in the quantitative easing program, the economy should keep chugging along, which means unemployment will continue to come down as inflation rises.
FED: 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.Translation: We're pretty sure that the worst of the risks facing the economy and everyone's jobs are past. But this low inflation is a little worrying. We'll keep an eye on that.
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. 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 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: Congratulations! The economy is moving in the right direction. To celebrate, we're putting financial markets in QE detox by gradually reducing the amount of bonds purchased every month in the quantitative easing, or QE, program. Don't forget, we're still buying billions of dollars of Treasury securities and mortgage-backed securities, so the stimulus party is still on -- just at a reduced level.
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: We're going to keep reducing asset purchases if the economy continues to improve. The asset purchase portion of monetary policy isn't full steam ahead, but it's close. Other policy tools are still set at warp speed, and they'll stay there until employment and inflation seem just right. Past results are no guarantee of future returns: We could change our minds on any of these policies based on the economic data.
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 zero 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: Interest rates are going to stay low for a long time as long as inflation doesn't pop up all of a sudden. We will parse all the economic data and figure out when we're getting close to an interest rate hike. We're basically waiting to see some inflation, but it's tricky as we don't want to see too much of it.
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.

With the unemployment rate nearing 6 1/2 percent, the Committee has updated its forward guidance. The change in the Committee's guidance does not indicate any change in the Committee's policy intentions as set forth in its recent statements .
Translation: Once again interest rates will stay very low for a long time. By the way, that 6.5 percent unemployment rate turned out to be a little meaningless with no inflation. Removing the 6.5 percent unemployment threshold changes nothing. It's still a wait-and-see-what-happens situation.
FED: 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 Committee's commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity .Translation: Former inflation-hawk turned dove, the president of the Minneapolis Federal Reserve Narayana Kocherlakota believes the Fed should send a stronger message about its commitment to fighting disinflation. Wonder which hairs he would have split to strengthen the message?


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The Fed finds that the winter thaw has helped the economy rebound from cold-weather slowdowns.

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