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What the Fed statement really said

Claes Bell

Acknowledging that economic growth "paused" in the last quarter of 2012, the Federal Open Market Committee sounded an optimistic note about the prospects for the world economy at its latest meeting. Here's what the Fed said in the statement it released and our translation of what it means 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 growth in economic activity paused in recent months in large part because of weather-related disruptions and other transitory factors. Translation: By "other transitory factors," we mean "Congress." Economic growth went negative in the fourth quarter, in part because of a major drop in government spending tied to the "fiscal cliff" drama we warned you about. Superstorm Sandy didn't help, but this is why we can't have nice things.
FED: Employment has continued to expand at a moderate pace, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has shown further improvement. Translation: Despite some OK job growth, unemployment is still stuck at 7.8 percent. On the bright side, consumers and businesses are spending at a decent pace, and the housing market is starting to heat up.
FED: Inflation has been running somewhat below the committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable. Translation: Don't start heating your house by shoveling $1 bills into the furnace just yet. Inflation is pretty tame overall, with prices rising 1.7 percent over the same time last year, and looks to stay at about that level for the foreseeable future.
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 proceed at a moderate pace and the unemployment rate will gradually decline toward levels the committee judges consistent with its dual mandate. Although strains in global financial markets have eased somewhat, the committee continues to see downside risks to the economic outlook. The committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. Translation: It's taking a while, but we think our plan to fix the economy is working. But it could all go to hell in a finely crafted European handbasket if debt problems resurface overseas.
FED: To support a stronger economic recovery and to help ensure that inflation over time is at the rate most consistent with its dual mandate, the committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. 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. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the committee will continue its purchases of Treasury and agency mortgage-backed securities and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
Translation: To drive down interest rates and load up the banks with cash to lend, we've been buying about $85 billion per month in long-term Treasuries and mortgage-backed securities.

If that seems like a lot of money, it is. The total value of investments we hold hit $3 trillion for the first time this month. That's more than the market value of the 10 largest U.S. companies combined, which is a little scary. But man, you should have seen the confetti and balloons that dropped out of the ceiling when we bought the bond that put us over the top! It was great.
FED: To support continued progress toward maximum employment and price stability, the committee expects 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. In particular, the committee decided to keep the target range for the federal funds rate at zero (percent) to 0.25 percent and currently anticipates that this exceptionally low range for the federal funds rate 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. 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: The timetable we set up for raising rates wasn't working, so the new plan is to keep rates at rock bottom until the unemployment rate hits 6.5 percent -- about where it was in October 2008. That plan could change if inflation spikes, in which case we'll go back to the drawing board and maybe start one of those gold-buying websites.
FED: Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations. Translation: Everyone voted for this plan but Esther George, president of the Federal Reserve Bank of Kansas City, Mo., who's taking over for Richmond, Va., Fed President Jeffrey Lacker as the person who disagrees with us on everything.

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