The Federal Open Market Committee (FOMC) announced today that it is holding the Fed funds rate steady at 2%. But what does that mean for consumers? Quicken Loans Chief Economist breaks it down for us, translating each line of econo-talk to everyday lingo…
Federal Reserve Press Release – Release Date: June 25, 2008
For immediate release
Bob: Now
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.
Bob: The Federal Open Market Committee (those 10 crazy dudes and dudettes that get to determine short term rates) kept that short term rate 2%.
Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.
Bob: Here they say that they are seeing the overall economy growing slightly – caused in part by households (peeps like you and me) spending a little more. But, they worry that unemployment is rising a bit. They also say that the financial markets are under considerable stress. And finally, they say that tight credit conditions (tough to get a loan), the ongoing housing contraction (tough to sell a house) and the rise in energy prices (lots of swearing at the gas pump) will weigh on economic growth over the next six months.
The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.
Bob: The Fed thinks that prices (inflation) will drop some late this year and into next year. However, they do worry about the high price of oil and food.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Bob: They believe the substantial easing of monetary policy (meaning – the big drops in short term interest rates they’ve initiated so far) and the other stuff the Fed has done to help banks (basically provide those banks money) will help the economy in coming months. By saying that “downside risks to growth have diminished” and “upside risks to inflation have increased”, they are saying they are more worried about prices rising than they are about the economy losing jobs. The bond market liked that statement and rates dropped a little after the announcement. (The bond traders liked that statement because it means the Fed won’t allow inflation to get out of hand – which makes bond traders very happy).
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.
Bob: All did not agree! Richard Fisher thought the Fed should have raised rates.
