Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective. Market-based measures of inflation compensation have declined somewhat; survey-based measures of longer-term inflation expectations have remained stable.
The Fed is getting more and more frisky as time passes. They still give us a little “yeah, but,” (where they say things are good but then point out stuff that makes them nervy), but they are getting a little more definitive in their optimism about the economy. They point out that things keep getting better for people looking for jobs and that people and companies are spending more dough. They do still worry a bit about the housing market. All-in-all, this is like getting out of the dentist chair with no cavities and only a mild warning to do a better job flossing… Nice work US economy!
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.
Paragraph 2 is the, “This is our job,” paragraph. They remind us that their job is to balance people getting jobs with the prices people pay. The Fed tells us that, in their opinion, they think they are doing a pretty sweet job balancing the two “mandates.” Seems the Fed is feeling pretty darn good about themselves these days…
The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this 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. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
This is a very exciting and momentous paragraph (at least if you’re an econo-nerd and dig this kind of stuff). The Fed, way back in October of 2008, announced they would do something they had never done before. They announced that they would go into the market and buy giant amounts of mortgage and Treasury bonds. They did that to drive the rates on those bonds down which would cause people to refinance and generally reduce their monthly payments (hoping people would take the savings and spend it on stuff which would cause businesses to make more of that stuff and hire more people to make the stuff). This paragraph announces that, after 5+ long years, that program of buying those bonds has come to an end. This wasn’t a surprise – but it ends a very interesting chapter in US economic history and Federal Reserve history.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.
This was the paragraph all the economists and bond traders around the world jumped to the instant this report came out at 2p. They were looking for the four magic words that I highlighted above. Those words tell the world that the Fed intends on keeping short term rates at near 0% for a while. That makes bond traders happy. However, because the Fed was so downright giddy with the rest of their announcement and so happy about the way they see the economy shaping up – both the bond and stock markets have reacted somewhat negatively. Why would those markets not like a happy Fed? Because a happy Fed is a Fed that isn’t pumping money into the economy as much and less money in the economy means that it won’t be as easy for lenders and companies as it may have been in the past. But don’t be alarmed – the market changes weren’t that big. For the most part – this wasn’t an earth shattering announcement.
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. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
More chitty chat about keeping rates low. Okay Fed – we get it.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Narayana Kocherlakota, who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset purchase program at its current level.
All the nerds did NOT agree! Narayana Kocherlakota isn’t as happy with the economy as the rest of the nerds. He’d rather the Fed commit to keeping rates low until inflation goes up to at least 2%. Word on the street is that he challenged Chairwoman Yellen to an arm wrestling match to decide things and that Ms. Yellen accepted and that, let’s just say, Mr. Kocherlakota is a little embarrassed right now…