federal reserve

What did the Federal Reserve say?

Besides knocking off another $10 billion from the monthly asset purchases, the outcome of this week's meeting of the rate-setters at the Federal Reserve was more than a little deja vu.

Approximately 130 words plus two numbers separated the Fed's March monetary policy statement from the statement released today. Which ones were they?

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What the Fed said

What the Fed meant

FED: Information received since the Federal Open Market Committee met in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter, in part because of adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending appears to be rising more quickly. Business fixed investment edged down, 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: Brevity is the soul of wit. It's also the secret to communicating monetary policy with twitchy markets. Summing up the changes in the economy since the March meeting of the Federal Open Market Committee, the central bank struck a fairly optimistic note:

The economy seems to be thawing after a frigid winter. The employment situation is looking good, but could be better. People are spending money, but not on houses. Businesses aren't investing quite as much as they were in land, machinery and buildings.

Congress is still a pain and someone seems to have temporarily misplaced all the inflation that should be around here somewhere. Besides all that, everything is bumping along.

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. 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: The pesky dual mandate on employment and price stability has turned into Whac-a-Mole. Right as unemployment seemed to be coming under control, a little disinflation took hold. That could be bad, but the Fed has its collective eyeballs on it.
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 May, the committee will add to its holdings of agency mortgage-backed securities at a pace of $20 billion per month rather than $25 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $25 billion per month rather than $30 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 casually edging away from the quantitative easing program. Slicing $10 billion from monthly asset purchases for the fourth time, the total is now down to a mere $45 billion. It started at $85 billion per month.

The central bank is still pumping lots of money into the banking system through asset purchases and the reinvestment policy. If you think you might buy a home in the next couple of years, now may be better than later in terms of mortgage rates because quantitative easing is helping to keep a lid on long-term rates.

Technically, QE should be inflationary, so who knows where inflation would be without it?
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: Typical boilerplate: Management, in this case, the Fed, reserves the right to change or modify the asset purchase program at its discretion. If employment and inflation seem within the realm of reasonable, the wind-down of quantitative easing will continue.

If the temperature of the economy vastly changes … well, don't say you weren't warned that Fed policy could change.
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 staying low. They won't be raised until the economic soup is just the right temperature, and right now it is still way too cold.
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 if inflation magically bounces to 2 percent and unemployment drops to utopian levels, interest rates will stay low until the committee is good and ready to throw in the towel.
FED: In last month's statement that it didn't say this month.

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: The March statement included a caveat explaining the diversion from the previous forward guidance, which offered an unemployment rate of 6.5 percent as a potential indicator of tightening monetary policy. That paragraph is gone and so is any reference to a specific unemployment rate. An interesting footnote in the annals of central banking history, or pointless minutiae?
FED: Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Richard W. Fisher; Narayana Kocherlakota; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo.Translation: Everyone is on board this month. Whatever objection Narayana Kocherlakota had to the fifth paragraph in March has vanished this month. This, despite the fact that the paragraphs are identical. Presumably, there was no dissent because everyone digested the change to forward guidance in March without the world spinning off its axis.

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