Our smarty-pants friends at the Federal Reserve announced today that they will once 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?)
The following is an official press release from the Fed regarding its decision today and a translation (for the rest of us) from our Chief Quizzologist:
FEDERAL RESERVE Press Release
Release Date: August 10, 2010
Fed: For immediate release
Chief Quizzologist: Now
Fed: Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.
Chief Quizzologist: Lots going on in this paragraph. The Fed starts by saying the economy isn’t recovering as fast as hoped. Some things are good – for example, businesses are spending more. Some things are bad – households (you and I) are spending less (because lots of people don’t have jobs). That said, the Fed thinks things will get better – although not as fast as they had hoped a while ago.
Fed: Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
Chief Quizzologist: Inflation means that prices of stuff are rising. People who sell stuff raise prices when people who buy stuff want more of it. When the people who buy stuff aren’t buying, people who sell stuff don’t raise prices. That’s what’s happening and that’s bad for the economy. But, that’s good for interest rates (interest rates tend to fall when prices fall). And falling interest rates are good for mortgage rates.
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.
Chief Quizzologist: The Fed will keep short term rates low for a long time. Yay.
Fed: To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.
Chief Quizzologist: This is a biggie. The Fed bought $1.2 Trillion in mortgage bonds last year. That was super – it brought mortgage rates down. What they say here is that as those bonds pay off (and the cash comes back to the Fed), they will reinvest that cash into Treasury bonds (and maybe mortgage bonds). That will have the effect of keeping mortgage rates low.
Fed: The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
Chief Quizzologist: Do they really need to say this? It’s like your pilot saying that he will continue to look out the window and at the instruments to monitor the flight.
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.
Chief Quizzologist: Everyone did NOT agree.
Fed: Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee’s ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve’s holdings of longer-term securities at their current level was required to support a return to the Committee’s policy objectives.
Chief Quizzologist: Thomas Hoenig thinks the Fed should raise rates.
