federal reserve

What did the Federal Reserve say?

The world breathlessly anticipated this week's meeting of the Federal Reserve. So much suspense swirled around two little words buried within the policy statement: considerable time.

Will it still be a considerable time until interest rates lift off, or did the Fed offer some other vague indication of when rates might increase?

Is the choice of words likely to appease the slavering hordes in the stock market? And what's going on with inflation? Read on to find out what the Fed said this time.

What the Fed said

What the Fed meant

FED: Information received since the Federal Open Market Committee met in October suggests that economic activity is expanding at a moderate pace. Labor market conditions improved further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish.Translation: The economy is growing at a steady pace, and while it's not great, it beats a sharp stick in the eye. Fewer people are unemployed. The number of people who are underemployed also is dwindling.
FED: Household spending is rising moderately and business-fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices. Market-based measures of inflation compensation have declined somewhat further; survey-based measures of longer-term inflation expectations have remained stable.Translation: Individuals are reluctantly prying open the old wallet a bit more, and businesses are investing in equipment and buildings at a nice pace. Housing … well what can you say about housing? It's been the black sheep of economic data for some time. Inflation is still sluggish, but the committee is pegging that on energy prices this month -- the price of oil has tumbled, in case you've been living in a cave. There are a couple of different ways of measuring inflation, and they're not aligned at the moment. In the long run, it looks like it will be all good, so everybody be cool.
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 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. The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.Translation: Inflation and employment: It's what they do at the Federal Reserve. And, everything looks OK and on track. Just in case, the Fed will stay on top of prices and make sure they keep going up over time. Though perhaps perverse, it's better than the alternative.
FED: To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, 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.Translation: Interest rates will stay put, set on ultralow, as close to zero as possible. The central bank isn't sure how much longer rates should stay in the cellar. The perfect economic conditions are kind of like the infamous definition of obscenity from the Supreme Court: Fed policymakers aren't sure what it looks like, but they'll know it when they see it.
FED: Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, 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. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.Translation: Everyone wants to know when interest rates are going to go up. The best the central bank can say at this point is that everyone just needs to chill. There's been a certain amount of obsession over the so-called calendar-based phrasing that indicated that it would be a considerable time following the end of the asset purchase program before rates rose. But if economic data starts looking much rosier, maybe rates will go up sooner rather than later. For now, plan on later.
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. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.Translation: The asset purchase program, also known as quantitative easing, officially ended in October -- meaning the Fed isn't buying more bonds and further expanding its balance sheet. But the program, and hopefully, its interest-rate-lowering impact, lives on in the investments the central bank now owns. Proceeds from maturing bonds will be reinvested in similar issues, and payments from mortgage-backed securities will be funneled back into those investments.
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: Don't expect things to get back to normal quickly. The new normal could include an average federal funds rate that is much lower than the historical average for some amount of time. It could be one year, it could be forever.
FED: Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo.

Voting against the action were Richard W. Fisher, who believed that, while the Committee should be patient in beginning to normalize monetary policy, improvement in the U.S. economic performance since October has moved forward, further than the majority of the Committee envisions, the date when it will likely be appropriate to increase the federal funds rate; Narayana Kocherlakota, who believed that the Committee's decision, in the context of ongoing low inflation and falling market-based measures of longer-term inflation expectations, created undue downside risk to the credibility of the 2 percent inflation target; and Charles I. Plosser, who believed that the statement should not stress the importance of the passage of time as a key element of its forward guidance and, given the improvement in economic conditions, should not emphasize the consistency of the current forward guidance with previous statements.
Translation: Most of the committee members were on board with the statement, but three said nay.

Richard W. Fisher, the president of the Dallas Federal Reserve Bank, believes that the economy has kicked into gear and will be ready for higher interest rates soon.

Narayana Kocherlakota, president of the Federal Reserve Bank in Minneapolis, dissented because he thinks the committee isn't being serious enough about the 2 percent inflation target. He might like the Fed to do more to stimulate inflation.

Charles L. Plosser, president of the Philadelphia Federal Reserve Bank, wants to throw out all the time nonsense and the ghosts of policy statements past in light of economic improvements.


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