Thursday, June 23, 2011

Interpreting the Fed

The Federal Reserve released the following statement after its meeting on Wednesday. Because people sometimes complain that the Fed's language isn't entirely clear, I have taken the liberty of interpreting the statement for you in what I hope is a more comprehensible form. Below is the full text of the Fed's statement. Following each paragraph, I have written my interpretation in italics of what the Fed really meant to say:

Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.

The economy is still stuck in a rut and things are not getting better. Ain't nobody getting jobs. We are hoping and praying that the bad state of the economy improves and that higher food and gasoline prices go back down. We also hope the earthquake/tsunami/nuclear catastrophe in Japan does not prevent that country from making things again. On a positive note, people keep spending more money and companies are buying more things. But don't get your hopes up because nobody is investing and nobody wants to buy a house. Like we said before, food and gasoline prices have gone up. Despite those rising prices, we are still pretending that nobody expects prices to keep going up.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

Congress wants us to create more jobs and keep a lid on inflation at the same time. We know this is impossible, but we're trying anyway. People still can't find jobs, but we're hoping they will find them soon so that the unemployment rate will continue going lower. Oh wait, the unemployment rate has been going higher. Never mind. Anyway, just in case you didn't understand us the first two times, we want to tell you again that prices are going up. Despite that, we are hoping nobody really notices. But the next time we go shopping, we'll be sure to check if prices are still going up.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

All you old folks out there who were hoping to earn more interest on your savings account, well you can forget about that. We're not kidding. You really can forget about earning more interest in your bank account because we're going to make sure interest rates stay low. We told you we would complete QE2 and we meant it. And just in case you don't like it, tough. Get used to it because we might even do QE3.

The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability.

We'll be watching CNBC just like the rest of you so don't be surprised if we do something stupid just to spite Rick Santelli.