Like a guy whose parachute has just opened, the economy is falling, but not as fast as it once was. That’s the gist of the Federal Reserve’s April 29 monetary policy statement. The Fed said it will keep short-term and long-term rates low until the economy clearly is improving.
The Federal Reserve’s monetary policy statements aren’t necessarily easy to understand, so here is a translation that explains what the Fed said and what it meant in plainer English.
|What the Fed said||What the Fed meant|
|FED: Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.||Translation: The economy is still contracting, but it’s not getting worse as fast as it once was. Consumers who have jobs might have cut their household budgets as much as they’re going to — but that doesn’t mean they’re soon going to start spending more. Businesses are cutting back on staff and other expenses. As for the future, the economic outlook is a little better than it once was, but the economy is likely to remain weak for a while. The combination of the Fed’s actions and the government’s stimulus spending will contribute to a gradual resumption of economic growth at some point.|
|FED: In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.||Translation: The Fed is more concerned about addressing the risk of deflation in the near term than inflation in the longer term. Fight today’s battles today and tomorrow’s battles tomorrow.|
|FED: In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of financial and economic developments.||Translation: To boost economic growth and encourage lending and borrowing, the Fed will continue doing what it has been doing. The federal funds rate will remain near zero percent. The Fed will buy up to $1.25 trillion in mortgage-backed securities this year to keep mortgage rates low, and will buy up to $200 billion in Fannie Mae and Freddie Mac debt. To push down on other long-term interest rates, the Fed will buy up to $300 billion in Treasury securities over the next five months.|
|FED: Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.||Translation: This policy decision was unanimous.|