The central bank remains a mystery wrapped in a neatly trimmed beard, despite the unprecedented level of transparency under Chairman Ben Bernanke's leadership.
In something of a surprise move, the central bank proved it isn't out of tricks just yet. On Wednesday, the Federal Open Market Committee announced a very slight reduction in the level of stimulus to the economy while simultaneously saying that interest rates will stay close to zero for longer than they initially thought.
Well played, FOMC, well played.
So what did the Fed say?
What the Fed said
What the Fed meant
|FED: Information received since the Federal Open Market Committee met in October indicates that economic activity is expanding at a moderate pace. Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated. Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing. Inflation has been running below the committee's longer-run objective, but longer-term inflation expectations have remained stable.||Translation: The economy is actually improving, despite Congress, not quite as quickly as we'd like, but we'll take it. By the way, folks, lots of houses are still on the market if you're thinking of buying.|
|FED: Consistent with its statutory mandate, the committee seeks to foster maximum employment and price stability. The committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the committee judges consistent with its dual mandate. The committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.||Translation: We have done a pretty darn good job, bringing the unemployment number down. With our ongoing support, that should continue. The other part of our job, inflation, is lagging a bit, but we'll keep an eye on it.|
|FED: Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.||Translation: It's time for a ticker taper parade! Woot woot! But seriously, don't go too crazy because asset purchases are still incredibly large at $35 billion and $40 billion of mortgage-backed securities and Treasuries, respectively. Just think where we would be if Congress acted to help the economy rather than slow it down.|
|FED: The committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the committee's dual mandate.||Translation: By continuing to purchase extremely large portions of mortgage-backed securities and Treasuries, long-term rates should stay low. We're talking to you here, bond markets. Don't get any crazy ideas. We are still in loosey-goosey, highly accommodative policy town. |
Inflation is low, but we should point out that purchasing $75 billion worth of assets is still a big deal and should get prices soaring eventually.
|FED: The committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the committee's decisions about their pace will remain contingent on the committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.||Translation: If the economy continues to improve, asset purchases will be reined in accordingly. Nothing is set in stone; further steps will be dependent on the data.|
|FED: To support continued progress toward maximum employment and price stability, the committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of zero to 0.25 percent will be appropriate at least as long as the unemployment rate remains above 6.5 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. |
The committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the committee's 2 percent longer-run goal. When the committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
|Translation: Just to underline the fact that monetary policy is essentially unchanged, we're doubling down on our interest rate projections. The federal funds rate is going to stay near zero longer than we initially thought because of this pesky low inflation. At this rate, the unemployment rate will hit 6.5 percent in no time and we're nowhere near raising rates. The ball to watch at this point is inflation. But even then, it will be a really, really long time.|
|FED: Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Esther L. George; Jerome H. Powell; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Eric S. Rosengren, who believes that, with the unemployment rate still elevated and the inflation rate well below the federal funds rate target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.||Translation: Now that Esther George is happy with the direction of monetary policy, an inflation dove is giving the thumbs down. You really can't make everyone happy.|
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