FOMC Announcement: No Overnight Rate Change, Slight Inflation Bias

Below is the full text of the Fed’s FOMC decision from their two-day meeting that just ended. They kept short-term Discount and Fed Funds rates the same and said that ‘inflation will remain subdued for some time’ but this is a slight change from the April statement that said ‘sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.’

We’ve gone from a borderline deflation message to a tame inflation message. But in these uncharted economic and policy waters, markets are interpreting this change as more severe than ‘subdued’. Mortgage and Treasury bonds, which hate inflation, have sold off after the announcement, pushing rates higher. The only thing that will help rates at this point is the FOMC’s reiteration of their continued mortgage and Treasury bond buying. In recent weeks since May 21 when inflation and bond supply problems started pushing bond prices lower (and rates higher), the Fed has not increased their mortgage bond buying, and in fact, they bought less last week than in any of the previous 2 months. So until they step up buying, rates will remain in their current range.

Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be 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.

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.

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 will buy up to $300 billion of Treasury securities by autumn. 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.