The March FOMC Statement for Dummies

Image Thanks to Monova.com
Image Thanks to Monova.com

The Federal Reserve Open Market Committee (FOMC) is a vital component to the United States monetary policy. This committee exists within the Federal Reserve System and is primarily tasked with overseeing the nation’s open market operations, which in turn, affect the money supply and even interest rates for the entire American economy. So, it sounds like a pretty important gig, eh? Well, that goes without saying, however, what doesn’t, is what the FOMC official statement is really talking about. After all, this publication is created by some of the most experienced and educated minds in the world of mathematics, banking, financial statistics, economics, etc. Though the data and figures may make sense to them, it also could escape some of us who are shall we say… gifted in other areas? Thus here is the purpose of this blog post: we will look at the two major aspects discussed by the  FOMC   statement,  unemployment and inflation. Sometimes, information needs to be presented in such a way so that even us dummies can understand, right?

“A range of labor market indicators suggests that under-utilization of labor resources continues to diminish.”

fredgraphAnalysis: This quote is seen in the first paragraph of the FOMC report and covers another major area of concern for the Fed: the rate of unemployment and its implications for the economy. Luckily, this report indicates a continuing decrease in the unemployment rate thus far (5.5% as of February 2015, according to FRED); however, the mentioning of under-utilization of labor can be difficult to understand at first read. Without prior knowledge of how exactly labor can be utilized effectively in the economy, one can simply write this statement off as, “There just weren’t enough jobs and too many workers. An increase in jobs is what made this number go down.”

This doesn’t seem to the case at all in other parts of the job market, as indicated by a previous blog post of mine which analyzed the labor market for the restaurant industry. In this market for labor, restaurants seemed to be experiencing a shortage in workers and a surplus in available jobs as a whole. Yes, there were reported low numbers of qualified employees for higher-end establishments, however the real area of concern was for the fact that lower level food and beverage restaurants were having difficulties filling positions as well. Thus the conclusion here is that under-utilization could be better explained by other factors, such as: the increase in business technology redefining job requirements and education, changing expectations of the labor force itself, or the development of new job markets altogether.

“In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.”

Analysis: The target range mentioned in this second statement by the FOMC report, is in reference to the federal funds rate (which is stated as being between 0% and 1/4% by the same document). The federal funds rate here, is very low as a means to increase prices by positively influencing the demand for goods and services in the economy. This is an attempt to increase inflation, which is stated in the quote above by the FOMC.

Graph Thanks to Bloomberg
Graph Thanks to Bloomberg

Of course the average person would think, “…but isn’t inflation bad?” The answer to this is: it depends. See, the US economy is seeing an abnormal deflation of prices as a result of the increase in the value of the dollar globally, along with many other indicators, such as a strengthening economy as a whole. Bloomberg reports one example of this when comparing the US dollar (USD) to the Euro (EUR). The current exchange rate is 1.0884 USD for 1.0000 EUR. This is a 21.75% increase in the value of the dollar from the peak gap in the exchange rates on May 7, 2015, where the dollar traded for 1.3910 USD to 1.0000 EURJanet Yellen, a Federal Reserve Chairwoman, reports to The Wall Street Journal that:

“A stronger dollar is holding down import prices and, at least on a transitory basis, at this point pushing inflation down.”

The deflation which is occurring in the US economy is doing so too rapidly to be healthy, and the strengthening of the dollar actually makes US goods less desirable to purchase abroad. This translates to declining profits for American businesses who rely on exportation of goods. The Fed’s policy to increase inflation to 2% is seen as a mechanism to ease this deflation that is occurring.

Thus, here is the conclusion to this analysis: two points of interest that are discussed everyday, by every walk of life, and any average person, can easily be misunderstood. Unemployment and inflation seem to be very common words that can come up in any discussion about the economy; so an understanding of the true nature of these topics by the Fed, can mean a lot. The FOMC report that was examined in this blog post, covered various economic points of interest, however two main themes were likely to stick out even more so to the average person because they are familiar and commonly discussed in media and in the quotidian. So with all of that said, at least now these two topics about US inflation and unemployment in the FOMC report won’t make a dummy out of you.

Image Thanks to Bloomberg
Image Thanks to Bloomberg

Sources: Monova, The Federal Reserve, Investopedia, The Wall Street Journal, FRED

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