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 December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. 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 seems to be growing, and job losses are slowing. Consumers are spending more if they have jobs and good credit. Businesses are buying equipment and software, but they aren’t constructing new buildings and they are reluctant to hire. Companies have built up or drawn down their inventories, whichever they needed to do. Interest rates are low enough to stimulate growth if banks would be more willing to lend. The economy will grow slowly for some time as more people get hired and office buildings gradually fill up.
FED: With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time. Translation: Unemployment is high and that will keep inflation low for some time.
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. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets. Translation: The target federal funds rate will remain between zero percent and 0.25 percent. High unemployment and low inflation will stick around for a while, so the federal funds rate will remain near zero for an extended time. The Fed is winding down its purchases of more than a trillion dollars’ worth of mortgage-related debt. It will stop buying mortgage-related debt by the end of March. That’s been the plan for a while and it’s still the plan, although it is subject to change if things go south in the financial markets.
FED: In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit will be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth. Translation: To keep the financial system from flaming out at the end of 2008 and beginning of 2009, the Fed came up with myriad ways of pouring money into it. It is gradually closing the money spigots, as previously announced. These plans are subject to change in an economic or financial emergency.
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 economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted. Translation: Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, believes that economic and financial conditions have improved enough to begin signaling an eventual rise in the federal funds rate. He thinks the Fed should stop saying that it will keep the federal funds rate near zero “for an extended period.”