Translating what the Fed said

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The Federal Reserve’s rate-setting committee meets eight times per 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. In case the wording isn’t clear, here’s a translation of what the Fed said and what it meant.

What the Fed said What the Fed meant
FED: Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Translation: The economic recovery has slowed down in recent months. Consumer spending is rising gradually, but is held back by high unemployment, stalled wages, falling home values and tight credit. Businesses are spending more on equipment and software but less on buildings. Businesses are reluctant to hire. Home construction has slowed to a crawl. Banks aren’t lending as much.
FED: 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 more modest in the near term than had been anticipated. Translation: Things will get better, but not real soon.
FED: Measures of underlying inflation have trended lower in recent quarters and, 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: Inflation has been low and, with unemployment high, inflation will remain low.
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 for the federal funds rate stays at a range between zero percent and 0.25 percent. It will stay that low for a long time, because unemployment is high and people expect prices to stay where they are.
FED: To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature. Translation: The Fed bought more than $1 trillion in mortgage-backed securities. Each month, some of the underlying mortgages are paid off. Instead of keeping the money, the Fed will lend it by buying government debt in the form of Treasury securities, thereby keeping the cash in the economy. The Fed will perform a similar duty with Treasury securities it owns: Whenever the central bank sells government debt, it will buy a comparable amount, putting the money back into investors’ hands.
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.

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.

Translation: All but one of the Fed board members voted for the rate policy described above.
FED: Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee’s ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve’s holdings of longer-term securities at their current level was required to support a return to the Committee’s policy objectives. Translation: Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, disagrees with his colleagues who believe the economic recovery has slowed down. His judgment is that the economy is recovering modestly, in line with economic projections from early this year. He believes the Fed is tying its hands by saying it will keep rates extremely low “for an extended period.” He doesn’t believe the Fed needs to keep buying government debt to pump money into the economy, either.