The Fed concluded their two day meeting this week and, as usual, they released a few statements at the end of the meeting. Economists, analysts, and investors watch these announcements for two types of information. First, they listen for what the Fed is actually telling the public. The secondary pieces of information they watch for are the things they can learn from reading between the lines. Fed statements are worded very carefully and they fully understand the impact their words can have.
I know–what could be more boring than reading the minutes from a Federal Reserve meeting? But you can learn a lot about the health of the economy from these carefully-worded statements. The Fed statement released September 23rd provided some insight as to how the Fed feels about the economy right now and how they plan to behave in the Future.
Recovery Is Underway, Growth Is Returning: There are several areas that demonstrate that we are probably heading out of the recession and back into economic growth. The Fed stated that, “economic activity has picked up following its severe downturn.” The housing market has shown signs of stabilizing with both prices and volume turning positive in recent months. The stock market has started a robust recovery as companies have reported earnings that are ahead of expectations. Most economists agree that GDP for the third quarter will turn positive.
Interest Rates Staying Low For a long time: It’s rare that the Fed gives too many hints about interest rate decisions, but in this statement they stated that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” The reasons for this are mainly that the economy still needs to make credit as easy to obtain as possible and that inflation is not yet a major factor for the Fed to contend with.
Inflation Is Under Control: The Fed “expects that inflation will remain subdued for a long time.” The keywords there, “for a long time,” indicate that interest rates are likely to stay low for an extended period of time. The Fed uses higher interest rates as a tool to fight inflation, but they want to keep rates low as long as possible to accommodate growth. Most experts agree that inflation is coming, but the consensus opinion seems to be that we are at least a year or two away from inflation becoming a concern.
Mortgage Rates Could Move Up: The Fed has spent billions of dollars on agency debt and mortgage backed securities to keep mortgage rates as low as possible. The Fed is one of the main reasons so many people were able to refinance their mortgages at such great rates. In this statement, the Fed reiterated that they will continue to support mortgage lending, just at a slower pace than they have the last several months.
There Are Still Reasons For Concern: The Fed named ongoing job losses, slow income growth, lower wealth in housing, and tight credit conditions as ongoing areas of concern that they are watching closely. Business spending is another area worrying the Fed, especially since they realize that business spending isn’t likely to pick up until consumer spending warrants business investment.