federal reserve

What did the Federal Reserve say?

The central bank did not change much in its monetary policy statement between the July and September meetings. Instead of offering cryptic allusions to the timing of a future rate hike, the Fed issued a separate release on policy normalization covering the process for getting back to business as usual. The end run around expectations threw a monkey wrench into the pundit debate that raged earlier this week over the two words: "considerable time."

Never fight the Fed; apparently it's a very tricky organization. Here's what else happened.

What the Fed said

What the Fed meant

FED: Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains 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. Longer-term inflation expectations have remained stable.Translation: Moderate economic expansion is a step up from modest, but it's not awesome. Housing, employment and inflation all remain bugaboos, but housing is the worst offender.

If you step back and squint a little at the numbers, you see that the labor market improved a little during recent weeks. After all, some jobs were added to American payrolls. It could have been better, though.

People bought cars and whatever else it is that they buy, while businesses bought equipment and buildings -- all at satisfactory levels. There were some laggards. (We're looking at you, potential homebuyers.)

Congressional bickering remains a drag on economic growth, but the economy continues to shake it off like a champ. Inflation is low now, but it will be fine in the long run, probably.
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 since early this year.Translation: The likelihood of a stagnant, flagging economy plagued by weaker and weaker inflation has receded. We're not entirely in the clear, but well, what can you do?

With inflation probably continuing to move up and the unemployment rate probably continuing to move down, a "mission accomplished" banner is in this central bank's future.
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 October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month.Translation: In keeping with the "mission accomplished" theme, the quantitative easing program is being wrapped up -- or, in other words, the old money-printing press is being retired. Next month only $15 billion worth of assets will be purchased. The Fed's economic kick in the pants started at $85 billion worth of bond buys each month.
FED: 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 isn't getting out of the market entirely. Principal payments from mortgage-backed securities will be reinvested in similar assets, and the money from maturing Treasury securities will buy newly issued Treasury securities, in general.

The Fed's investment portfolio will stay massively stuffed with trillions of dollars of investments for a while, and that should keep a lid on interest rates.
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 end its current program of asset purchases at its next meeting. 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: If inflation and the rate of unemployment continue to improve, then the Fed is out of the asset-purchase game. If prices and employment don't cooperate, let the asset-purchase party begin again!

Because there ain't no party like an asset purchase party, 'cause an asset purchase party don't stop. Until, of course, the outlook for the labor market has improved substantially in a context of price stability.
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: 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.
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: Even after a considerable time (whatever that means) has gone by and inflation and unemployment are nearly perfect, interest rates still may stay low. The Fed must remain inscrutable in its transparency.
FED: Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Narayana Kocherlakota; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action were Richard W. Fisher and Charles I. Plosser. President Fisher believed that the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee's stated forward guidance. President Plosser 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: Two dissents! Richard W. Fisher, president of the Dallas Federal Reserve Bank, and Charles I. Plosser, president of the Philadelphia Federal Reserve Bank, both took issue with the guidance on the timing of a future rate hike. Fisher thinks monetary policy will need to be tightened sooner rather than later, and Plosser seems to agree and also seems to hate the idea of locking the Fed into waiting a while before making a policy change.

Hawks gotta hawk.

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