My Mortgage Blog

Information received since the Federal Open Market Committee met in October suggests that economic activity is expanding at a moderate pace. Labor market conditions improved further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. 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, partly reflecting declines in energy prices. Market-based measures of inflation compensation have declined somewhat further; survey-based measures of longer-term inflation expectations have remained stable.

Happy, happy, happy.  The Fed is feeling better and better about the economy.  They see employment getting better; people and businesses spending more; and inflation lower than expected (big ups to falling gas prices!).  They did fret a bit about the housing market which is slower than usual.

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 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. The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.

This is the, “we’re doing our job” paragraph.  The Fed tries to balance jobs and inflation.  Right now, the Fed thinks that balance is pretty even.  And the Fed assures us that they will, “monitor inflation development closely.”  What else did they think we’d think they were doing – monitoring the line on this week’s upcoming Lions/Bears game?!  (Although I do love the thought of them sitting around the big table at the Fed having a serious debate about whether Suh can get to Jay Cutler or not…

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. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement 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 in October, 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.

Here’s the “money” paragraph.  This is the one traders fast-forwarded to.  The Fed tells us here that they will keep short term rates low (they are basically 0% right now).  They tell us that they can “be patient” when it comes to raising short term rates.  They see inflation as being lower than their goal of 2% (they’d actually like to see prices rise a little believe it or not…)  But, they leave us with a warning – if new information about inflation comes in showing it’s rising faster than they expect – they won’t hesitate to slap interest rates in the hinie and push them higher.  (Public service announcement to mortgage bankers who think that mortgage rates will always be at 4.0% - when we least expect it – something will happen in the world or with the economy that will send rates shooting higher one day…)

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.

Remember all those trillions of dollars of mortgage bonds the Fed bought?  Well those bonds pay both principal and interest.  When the Fed gets the principal back (as you and I pay our mortgages down), they reinvest that principal.  The reason this is noteworthy is that that reinvested principal is actually a lot of money.  If they were to change this stance (and not reinvest the principal) that would have the effect of pushing mortgage rates higher.  So – way to go Fed – keep on reinvesting that principal!

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.

This is where the Fed lets us know they aren’t insane and that they will act prudently when it comes time to shift their current stance of keeping rates low.  Whew…

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo.

Voting against the action were Richard W. Fisher, who believed that, while the Committee should be patient in beginning to normalize monetary policy, improvement in the U.S. economic performance since October has moved forward, further than the majority of the Committee envisions, the date when it will likely be appropriate to increase the federal funds rate; Narayana Kocherlakota, who believed that the Committee's decision, in the context of ongoing low inflation and falling market-based measures of longer-term inflation expectations, created undue downside risk to the credibility of the 2 percent inflation target; and Charles I. Plosser, who believed that the statement should not stress the importance of the passage of time as a key element of its forward guidance and, given the improvement in economic conditions, should not emphasize the consistency of the current forward guidance with previous statements.

All the nerds did NOT agree!  Richard Fisher, Narayana Kocherlakota and Chuckie Plosser both voted against the policy enacted by the Fed.  They disagreed for different reasons though.  It must have been a doozy of a meeting these past few days!