A Simple Explanation of the Last Federal Reserve Statement

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The Federal Open Market Committee voted last week to leave the Fed Funds Rate within its target range of 0.000-0.250 percent.

In its press release, the FOMC noted that the U.S. economy "has continued to pick up", that the jobs markets is getting better, and that housing market has shown "some signs of improvement" lately.

It's the fourth straight statement in which the Fed speaks optimistically about the U.S. economy -- a signal that the worst of the recession is likely behind us. Which doesn't mean that things are better, just that they are getting better.

Just as there was speculation about the end of the last "boom" before the impact of that end was felt, there is always a lot of conversation about recovery before its impact is completely felt. People who are struggling now may be feeling some relief, but they may continue to struggle for a while longer - though they can do so feeling that things are getting better, and should continue to do so.

The economy isn't without threats, however, and the Fed identified several, including:

1. Tight credit conditions for consumers


2. Businesses are reluctant to hire new workers


3. Lower overall housing wealth

The impact of each is obvious. Without more liquid credit, larger purchases like homes, cars, and business equipment may be stalled (or at least slowed) even though the demand or need for those purchases is growing. Until more people are employed, many families will be more conservative in their spending, delaying some of the benefits of the recovery. And finally, with less equity in their homes, people have a harder time releasing that equity for education, purchases, or opening new businesses. At least in our market area, since our price adjustments have been very moderate in comparison to the national averages, people have not lost as much housing wealth as in other parts of the country.

The message's overall tone remained positive, however and inflation appears to be held in check.

Also in its statement, the Fed confirmed its plan to hold the Fed Funds Rate near zero percent "for an extended period" and to honor its $1.25 trillion commitment to the mortgage bond market. That plan -- due to expire at the end of March 2010 -- should be noted by today's homebuyers. Fed insiders estimate that the program suppressed rates by 1 percent through 2009.

Mortgage market reaction to the Fed press release is negative. Mortgage rates aincreased after the annoucnement.

The FOMC's next scheduled meeting is January 26-27, 2010.

The Federal Open Market Committee voted to leave the Fed Funds Rate within its target range of 0.000-0.250 percent.

It also reiterated plans to support the mortgage market to the tune of $1.5 trillion.

In its press release, the FOMC noted that the U.S. economy is "leveling off" and that financial markets continue to improve.

The change in verbiage is the rosiest from the Fed since the start of the recession and it may signal that the downturn's end is near.

That said, the Fed highlighted lingering economic soft spots that could still impact a recovery through the end of 2009 and into 2010.

1. Ongoing job losses
2. Reduced "housing wealth"
3. Tight credit conditions

Furthermore, rising energy costs remain a threat to inflation.

Also in its statement, the Fed confirmed its plan to hold the Fed Funds Rate near zero percent "for an extended period" and to honor its $1.25 trillion commitment to the mortgage bond market.

Market reaction to the Fed's press release is muted. With no real change in message and a basic confirmation of what most investors already knew, Wall Street sees no reason to panic. Mortgage rates are unchanged.

The Fed's statement is another of a growing list of indicators that while we may have hit the bottom of our economic issues, they are not yet over. However, from my vantage point as a layman, it seems to me that real estate might once again see signs of the recovery before the entire economy does. Just as we were the first sector of the economy impacted by the economic woes, we might just be one of the first sectors to feel the benefits of the recovery. Sort of a "first in, first out" scenario. Of course, I temper that by reminding the reader that I am no economic expert, and my guesses are as invalid as any of yours.

The FOMC's next scheduled meeting is September 22-23, 2009.