FEDERAL RESERVE Press Release

Release Date: June 19, 2013

For immediate release

My view comments in red:

Now

Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

This is the “yeah, but” paragraph. The economy is doing better and jobs are coming back BUT, unemployment is still too high. People and businesses are spending more dough and house prices are going up BUT, the government isn’t spending enough money.

I had to look up “transitory” to see what they were talking about. I think what they mean is – despite some temporary stuff that won’t likely continue – the prices of stuff is lower than expected.

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. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

The key sentence here is the one I underlined. The Fed sees things getting better. So why are both stock and bond prices down right after the announcement? Because – if the Fed thinks things are getting better, they might stop buying so many mortgage bonds which could increase rates. (It’s kind of like people getting bummed out at a great party because the host said they might cut off the liquor at 11p instead of midnight).

The markets didn’t like the possibility of having the liquor cut off early. Stocks dropped after the announcement – and this chart shows what happened to mortgage prices (they dropped about ½ point for a 30 year fixed – which means rates went up by about 1/8% to ¼%).

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 decided to 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 Fed is saying here that they will, at least in the near term, continue to buy lots and lots of mortgage bonds to keep interest rates low.

The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

This the “duh – we’re going to do our job” paragraph. They say they will continue to closely monitor incoming information on economic and financial developments in coming months. That’s like your pilot coming on the intercom to tell you they will continue to monitor the instruments… Thanks 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 0 to 1/4 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 6-1/2 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.

The Fed says here that they will keep short term interest rates low even after they stop buying mortgage bonds (which means short term rates would stay low, but mortgage rates could move higher) for quite a while. They get pretty specific about some of the targets they are looking at – which is kind of unusual for the Fed. That means traders are going to start focusing on 6 ½% unemployment as a guide (today it’s at 7.6%).

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; 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 James Bullard, who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings, and 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.

All of them did not agree. Two voted against the action and wanted the Fed to be a little less generous in keeping rates so low.

Source:

http://www.federalreserve.gov/newsevents/press/all/2013all.htm

http://www.federalreserve.gov/newsevents/press/monetary/20130619a.htm

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FEDERAL RESERVE Press Release