Translating what the Fed said

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The Federal Reserve’s rate-setting committee meets eight times a year. Each time, the panel issues a monetary policy statement, which does a number of things: It describes the latest interest-rate stance, explains why the Fed came up with that policy, and gives a brief assessment of the economy. All well and good, but the document isn’t always easy to understand. That’s where Bankrate’s Fed translation comes in. We explain what the Fed said, and what it meant in plain English.

What the Fed said What the Fed meant
FED: Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability. Translation: The economy continues to strengthen, and unemployment is falling. Consumers spend more, but they would open their checkbooks even more if not for unemployment, stagnant wages, declining home values and tight credit. Businesses spend more on equipment and software, but not on buildings for stores, offices and factories. Businesses are still reluctant to hire. Banks are lending less, even though credit is available. The economy will recover gradually for a while, without much inflation.
FED: With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. Translation: Not to beat a dead horse, but the economy will recover gradually for a while, without much inflation. Why? Because unemployment is high and there are a lot of idle machines and factories, too.
FED: The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. Translation: The target for the federal funds rate will remain between zero percent and 0.25 percent for at least several more months. At the risk of sounding like a broken record, inflation is low and is expected to stay low for a while because a lot of people are unemployed, machines are idle, and there is a lot of vacant space in factories, offices and stores.
FED: In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral. Translation: Like a lollipop mogul stuffing kids’ trick-or-treat bags on Halloween, the Fed handed out billion-dollar bills to financial institutions during the crisis to keep money flowing. The fun stops June 30 because the largesse worked and financial markets are functioning again.
FED: Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly. Translation: There was one dissenter to this policy: Thomas Hoenig, president of the Federal Reserve Bank of Kansas City. The inflation hawk believes the Fed is tying its own hands, and daring inflation to resume, by hinting that the federal funds rate will remain near zero for an extended period.