The Federal Open Market Committee began its July 26th and 27th meeting with discussion about how interest rates and funds were dealt with during the financial crisis.The differences between then and now include changes the Federal Reserve has made to its policy tools and balance sheet, changes in market participants’ business practices, and the regulatory changes made around the globe to strengthen the financial system. These various changes have allowed more safeguards to keep the economy from taking another dive into crisis.
Here are the decisions:
- Stabilizing the Economy: Was a new monetary policy framework necessary in order to stabilize the economy further? The answer was no. The committee was convinced that right now the best course of action is to gain additional experience with recently developed policy tools, such as the payment of interest on reserves, and accumulating more information about some important considerations that are still evolving, including financial regulations and market participants’ responses to them.
- Monetary Policy: The committee would like to implement a long term monetary policy framework, the single most important component that must be contained within the framework is it flexibility to adjust the framework when implemented. The long term framework needs to give the FOMC enough power to make minute changes in case of disaster while still allowing for structure.
- Financial markets and open market operations. The committee discussed the current status of the dollar after the Brexit, otherwise known as the referendum for the United Kingdom to leave the European Union, which caused the pound to plummet along with security for the dollar. Luckily, global trade values on the dollar rose in light of the event. The committee could not help but report their appreciation for the resilience of the dollar and the U.S. economy. Through Brexit votes and uprisings in Turkey, the U.S. economy remains stable.
- Economic indicators: The labor market conditions generally improved in June and that GDP growth was moderate in the second quarter. Consumer price inflation continued to run below the Committee’s longer-run objective of the hard and fast two percent, kept on track in part by earlier decreases in energy prices and in prices of non-energy imports.
- Unemployment: The unemployment rate rose to 4.9 percent in June, partly reversing its decline in the previous month. Of course this is disconcerting as unemployment needs to come down for all, especially African Americans. To couple that figure, the labor force participation rate edged up in June, while the employment-to-population ratio came down. The unemployment rates for African Americans and for Hispanics stayed above the rate for whites, although the amount of jobless African Americans and Hispanics now is similar to that of the amount jobless before the recession.
- Housing: Housing activity has slowed in recent months, causing the recovery of the housing market to slow as well. As the FOMC reports in the minutes of the July meeting, “ Interest rates on 30-year fixed-rate mortgages decreased further, partly reflecting the declines in yields on Treasury securities. A number of large banks noted in the July SLOOS an easing of standards for home-purchase loans eligible for purchase by the government-sponsored enterprises (GSEs). Banks also reported a broad-based pickup in demand across most major categories of home-purchase loans. Indicators suggested a pickup in refinancing activity in response to the drop in mortgage rates.” With this fall in interest rates for homes and easing of the standards for home-purchase loans, a hopeful tone emerges. I see opportunity for buyers and minority buyers in particular as they continue to struggle to participate in the recovery but are facing the headwind of low inventory and high prices.
- GDP: GDP (gross domestic product) rose in the second quarter, predicting an even faster rate of growth for the GDP, triggering higher household wealth as well as lower interest rates. Inflation, a stress that always permeates the FOMC, was not forecasted for this meeting as the rate of inflation was lower than expected last quarter and crude oil prices and the cost of imported goods should keep the rate of inflation under the two percent line, which bodes well for all in the U.S.
- Business: Thigh level of motor vehicle sales and the higher single family home sales is not correlating with business investing market. It seems as though investors either do not have as much faith in investing in businesses or skepticism and stress from the Great Financial Crisis remains. Whatever the reason, the market for business investing remains soft.
Conclusion:
FOMC members noted that they continue to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market indicators would strengthen. Several votes were taken and passed to continue to reinvest principal payments from FOMC holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and the FOMC expects to continue doing this until the normalization of the federal funds has occurred.
The committee agreed to holding the next meeting at the end of September on the 20th and 21st, and I cannot wait after such a hopeful meeting. As long as interest rates remain low along with inflation, real estate will flourish. This is a great time to buy a home and I cannot wait to help more buyers and sellers with this information. The Power Is Now! If you have any real estate needs, please email me at eric.frazier@thepowerisnow.com. I look forward to fulfilling all of your needs!
Eric Lawrence Frazier, MBA
President and CEO