One of the favorite parlor games for economists and financial analysts is reading the Fed statements and interpreting what the language really means. Like Sovietologists back in the Cold War, these analysts look for the meaning between the lines. Maybe it is how a word is substituted from the way the statement was worded the previous month, or something that is missing from the statement, but each little clue has a meaning. The markets rely on these interpretations, because by themselves, the statements could lead to any of several competing policies. The markets are looking for evidence of how the Fed will move forward and whether their biggest goal will be to fight inflation by tightening the money supply, or to try and grow the economy with a loose money policy.

Interest rates have been set at 0 all year, and no one expected that would change and most of the statement restated what has been said in previous statements. The biggest change was the announcement that the Fed would discontinue it’s quantitative easing program of buying up Treasury securities by October, but that was widely anticipated and not a surprise. Some wording pointed to the economy recovering – “economic activity is leveling out” “financial markets have improved”. Other phrases emphasized the risk to the down side – “ongoing job losses, sluggish income growth, lower housing wealth, and tight credit”. The telling phrase may be a carry over from past statements – “the Committee expects that inflation will remain subdued for some time.”

In the end, reading the Fed statement is like looking at a Rorschach test. What you see in it depends on what you are looking for. The mortgage bond market (which is the basis for mortgage interest rates) went for a wild ride today, getting worse when the statement was first announced, but ending the day almost the same as where it started, keeping mortgage rates about the same.

Here is the statement in full:

Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by “. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

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