Let us now learn to parse the Federal Reserve's Open Market Committee statement.
To begin with, the Federal Open Market Committee -- FOMC for short -- sets interest rate policy. These 12 people have a lot to say about how much you pay for a mortgage.
The statement comes out at 2:15 after the FOMC meets. You can find a statement here.
The first paragraph of the statement usually describes the Fed's take on the economy. The major sectors of the economy -- employment, industrial production, etc. -- are usually discussed. Important economic trends are mentioned here.
The second paragraph is often the "inflation paragraph." The Fed opines on any "slack" in the economy. Slack is often a fancy way of saying lots of people are out of work. If there is lots of slack in the economy -- unemployment -- people can't find jobs or are worried about finding jobs meaning they are unwilling to buy much. That means businesses can't raise prices.
The final paragraph is traditionally the "balance of risks" paragraph. As the financial crisis took hold, the balance or risks became a balance of terror. This paragraph became devoted to listing all the ways the Fed is fighting the credit crisis. Look here now to find hints on how fast the Fed is "unwinding" the various credit supports it has put in place.
If you want to go deeper, you can parse the specific phrases the Fed uses to signal its intentions to markets. For example, there is the "extended period of time" language. Wall Street takes comfort in this because it means there is little risk interest rates will rise in the near future.
But what does "extended period of time mean?" One year? Six months? Until the Fed changes its mind? These questions have spawned an industry of Fed-parsers. Will the Fed switch from "extended period" to "some time" or " a while" or "as long as we feel like it?" Stay tuned!
For mere mortals, none of this parsing is necessary. Over the last few years the Fed has made a huge effort to communicate clearly it's intentions. Fed Chair Ben Bernanke actually thinks that is a good idea. Unless, of course, you make a living parsing the Fed.
Comments
I've found it an amusing exercise to practice speaking in the empty-yet-esoteric style of the FOMC. I used to sometimes speak that way at work when I had nothing to say but needed to sound impressive.
I think they've made it clear that they are in a reactionary mindset, waiting for some major economic shift to take place before they pursue any new action, which I guess means that they really aren't doing much of anything.