The Federal Reserve (Fed) decided today to leave its fed funds rate at the 0% to 0.25% range.
According to Quicken Loans Chief Economist Bob Walters, the decision to hold the rate was widely expected by financial experts.
“The Fed’s decision to maintain its Fed Funds rate at essentially zero is not a surprise,” said Walters. “The Fed’s statement indicates they see promising signs that the economy is finding its footing, but they were quick to add that the American economy isn’t out of the woods yet. The Fed added that while energy prices have risen recently, they are not concerned about inflation given the lack of demand in the marketplace. This is good news for interest rates – at least in the short run.”
The following is an official press release from the Fed regarding its decision today, plus a translation (for the rest of us) of all the financial jargon by Bob Walters:
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FEDERAL RESERVE Press Release
Release Date: March 18, 2008
For immediate release
Bob: Now
Fed: Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.
Bob: The Fed thinks the worst is over – but realizes it’s still rough out there. The Fed thinks all the medicine (money) they’ve pumped into the patient (the economy) is working and will continue to work. In other words, the patient is still sick, but starting to get better.
Fed: The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.
Bob: “Substantial resource slack” = lots of people sitting around jobless and lots of stuff sitting on shelves waiting to be sold. When lots of people need work, folks don’t ask for salary increases. When lots of stuff sits on shelves, retailers cut prices. So, “substantial resource slack” = low inflation = low interest rates = great home loan opportunities.
Fed: In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. 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 are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.
Bob: The Fed’s giant purchases of mortgage bonds have meant mortgage rates have been lower than they would have been had the Fed not been on a huge shopping spree. Now that the Fed is saying they are going to slow the rate of those purchases and conclude them in October, Uncle Sam won’t be supporting mortgage rates much longer. Translation: now might be a REALLY good time to refinance or buy a house.
Fed: Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dan Ward; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen
Bob: Everyone agreed!