Real Estate Toronto Canada

The Fed Open Market Committee met yesterday and released their report on the health of the economy. The FED meeting report is always looked at as something akin to stone tablets brought down from the mountain, the word from the highest authority. But unlike the stone tablets, the FED meeting reports aren’t clear or direct. Instead, their meaning is wrapped in code, vague and ambiguous so they don’t completely tip their hand as to what their monetary policy will be down the road. This means that financial analysts and FED watchers pour over the statements, looking for any change in wording to see if this signals a change in the FED’s direction. The FED’s mission is to maintain growth and stable employment while vigilantly defending against inflation. With short term rates set at 0-.25% (the rate available from the FED to the biggest banks) the threat of inflation is real. But with unemployment running over 9% (and much higher when underemployed and those who have stopped looking is factored in), and slack throughout the economy, the threat is still over the horizon.

The key wording in the report is that inflation is likely to be subdued for some time, and that they will maintain exceptionally low rates (short term rates, not necessarily mortgage rates) for an extended period of time. This means they aren’t likely to increase their base rates for months, and most likely not before the end of the year.

Here is the full FED statement:

Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

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. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.

Peter Thompson

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