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 April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing 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 continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time. Translation: Since the last time the rate-setting committee met (in late April), the economy continues to recover and jobs are being created, gradually. Consumers are spending more, but are hampered by joblessness, stagnant wages, declining home values and stingy banks. Businesses are spending more on equipment and software, but not on buildings and new employees. Home construction is in the dumps. Banks are more reluctant to lend than they were a few weeks ago, mostly because of the financial crisis in the European Union. Nevertheless, the Fed thinks employment will continue to grow slowly and inflation will remain contained.
FED: Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. 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: Prices of energy and commodities have declined somewhat in recent months, and inflation on other goods and services has fallen, too. Unemployment is keeping prices down, and inflation is likely to be subdued 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. Translation: The target federal funds rate will remain where it’s been since December 2008 — in a range between zero percent and 0.25 percent. With unemployment high and inflation low and expected to stay low, the federal funds rate will probably remain where it is for months longer.
FED: 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: If economic conditions change, the outlook for interest rates will change.
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: One member of the committee voted against this statement. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, wasn’t against keeping the rate near zero. But he did object to the phrase “likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

He cited two problems with it. First, some consumers, businesses and governments might make unwise spending and investment decisions on the belief that rates will stay low for a long time. Second, it ties the Fed’s hands if the central bank decides soon that it needs to raise rates a little bit.