The Federal Open Market Committee (Fed) – or as we affectionately call them, the “smarty pants” of the banking world – announced today that it will again hold its Fed funds rate at the 0% – 0.25% target range. (What the heck is the Fed funds rate and why should I care?)

While the Fed decided to hold the key rate at its current range, they are making other significant changes, according to Quicken Loans Chief Economist Bob Walters.

“The Fed today repeated that it intends to maintain its Fed Funds rate at exceptionally low levels for an extended period,” said Walters.  “However, the fact is that the Fed is making substantial cuts to its investments in the secondary market, which certainly signals a departure from the status quo.  These actions alone have the ability to push Treasuries and interest rates higher.”

The following is an official press release from the Fed regarding its decision today, plus a translation of all the financial gobbledygook from Bob Walters:

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FEDERAL RESERVE Press Release
Release Date: March 18, 2009

For immediate release
Bob: Now

Fed: Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding 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, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

Bob: The Fed was in a darn jolly mood when they wrote this paragraph. They are saying that they are seeing the economy starting to do better. Even though they are seeing businesses still laying people off, they see those businesses getting closer to being “right sized” for the current market we live in. The last jargony sentence means they think all the money they’ve been pumping into the economy will slowly make things better without increasing prices a lot.

Fed: With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

Bob: “Resource slack” means “I don’t have enough business to justify hiring more peeps”. The Fed says as long as that’s the case, prices of stuff aren’t gonna rise.

Fed: In these circumstances, the Federal Reserve will continue to employ a wide range of 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, 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.

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 $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.

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 is again saying that they are going to keep firing all their guns – spending giant wads of dough on mortgage bonds, cash for clunkers, housing credits, roads, earwax museums, etc – and they will also keep short term rates low (at basically 0%) for quite some time too.

The Fed did say they will start slowing down the pace of their purchases of mortgage bonds and they expect to stop those purchases in early 2010. However, they did throw out some hope that they might continue buying mortgage bonds when they said,

“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.”

Fed: Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Erin M Sherenco; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Bob: Everyone agreed!