Our smart friends at the Federal Open Market Committee (FOMC) announced today that they will again hold its Fed funds rate at the 0 percent to 0.25 percent range. (What the heck is the Fed funds rate and why should I care?)
While the decision to hold rates at current levels was expected, the dissenting vote is significant, said Quicken Loans Chief Economist Bob Walters.
“The Fed’s decision to hold its Fed Funds Rate was in line with all expectations,” Walters said.
“It was significant that the Fed statement did again acknowledge that the Central Bank intends to holds the rate low for an extended period. This essentially squashed the belief among some that the Fed was likely to begin raising its rates by the spring. This is good news for consumers, but was tempered with the confirmation that the Fed will exit the mortgage-backed security market by March. This is significant as their exit could send rates higher.”
The following is an official press release from the Fed regarding its decision today, plus a translation of all the financial gobbledygook from Bob Walters:
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FEDERAL RESERVE Press Release
Release Date: January 27, 2010
Fed: For immediate release
Bob: Now
Fed: Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
Bob: This paragraph is like many we’ve seen before. The Fed is saying that things are starting to get better, but that we aren’t out of the woods yet. In other words – Things are still bad, but less bad then before. If things keep getting less and less bad – one day they will be good…
Fed: With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time.
Bob: This simple little sentence is very important. Here’s where the Fed is saying that they don’t see inflation (rising prices) increasing anytime soon. They believe that because there is “substantial resource slack.” “Resource slack” is financial-ese for lots of people sitting at home unemployed and a bunch of factories sitting around idle.
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. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.
Bob: This is also an important paragraph. The Fed purchased 80 percent of all conventional (Fannie and Freddie) mortgage bonds last year. They’ve purchased almost a trillion dollars of mortgage bonds so far. They are saying here that they will finish that buying spree by the end of March. Many people wonder what will happen to mortgage rates when the buying spree ends. Looks like we’ll find out in March/April.
Fed: In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit wil be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.
Bob: Last year, when the economy wasn’t looking so hot, the Fed went crazy creating all kinds of ways to lend money (since the private markets had essentially stopped). They named these things with cool acronyms like TARP and TALF and ACPMMFF. The Fed is starting to wind these things down. This is good news because it means the markets are (kinda) starting to function again.
Fed: 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. Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.
Bob: Hold the presses! Everyone did NOT agree! Thomas Hoenig said “No” when the votes were cast. Tom thought the Fed should have raised short term interest rates because the economy no longer needs such aggressive short term rates (currently 0 percent).
