Federal Reserve Press Release In Plain English – December 2022

Inflation remains the focus for the Federal Open Market Committee of the Federal Reserve. Continuing on the Fed’s campaign to get it under control, they raised the target for the federal funds rate another 0.5% to a range of 4.25% – 4.5%. Of course, that’s sometimes not as important as what you can gain by reading the rest of the statement.

Here are key parts the press release with my analysis in bold below.

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

This section of the report is a status update of sorts. The Committee thinks the job market is strong and the unemployment rate remains on the low side. What they are really concerned about is inflation caused by supply chain disruptions, higher prices for food and energy and “broader price pressures.” This is Fed speak for “everything costs more” – something even the average consumer likely already knows.

Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are contributing to upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.

There’s no one benefiting from Russia’s war on Ukraine, and there’s much greater hardship than this to deal with. But interrupted access to supply routes and sanctions on Russian oil in particular aren’t helping with inflation either, so the Fed has its eye on that.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/4 to 4-1/2 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

If possible, there is even more packed into this paragraph than normal, but it’s the one every trader and analyst skips right to at the conclusion of these meetings. Let’s break it down in a more manageable three or four paragraphs.

The committee wants to see long-term inflation around 2% annually. This encourages people to buy now, which helps keep the economy stimulated, but it doesn’t run so hot that we have the high price increases we have now. To that end, they raised the target range for the federal funds rate another 0.5% to between 4.25% – 4.5%.

While Fed officials anticipate needing to continue to raise rates for a while so that this is achieved, the last couple of statements have pointed to the fact that they are particularly conscious that all of the data they look at is backward-looking by at least a month and sometimes longer.

Because of this lack of real-time data, there is a risk every increase could tip the economy into a recession unnecessarily. They’re being mindful of this.

Finally, the committee reiterates that it continues to sell assets off its balance sheet, including agency mortgage-backed securities (MBS). As the Fed sells its MBS, another buyer has to step in and pick up the slack. However, to do so, they may require a higher rate. As always, if you like a rate you see and you’re ready to move forward, go ahead and lock your rate. No one knows for sure which way the market will move next.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Simply put, this section of the statement goes over everything the Committee considers in making their rate decisions. However, there’s no doubt that inflation and inflation expectations have a higher priority right now.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.

It was a united front.