Federal Reserve Press Release In Plain English – December 2023

The Federal Reserve chose to leave the federal funds rate unchanged in December. Although this doesn’t directly impact mortgage rates, they tend to follow the same direction as the federal funds rate. Additionally, we got some of the first signs that relief may be on the way for those who have been waiting for lower rates.

Every 3 months, the Federal Reserve releases a summary of economic projections. The median projection is that the federal funds rate will fall to 4.6% by the end of 2024. It’s currently in a range between 5.25% – 5.5%. This is the most closely watched projection because it’s the one that the Fed controls. It’s certainly a reason for cautious optimism.

It is worth noting that rates have been coming down for several weeks now. If you like what you see, go ahead and apply online. Take the guessing game out of it altogether.

My plain English translation of the press release is in bold and labeled below.

Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.

Commentary: The Federal Reserve may be getting that soft landing officials have been talking about for a while now. Economic activity is slowing down enough to cool inflation. Although job gains are slowing, they’re still going in the right direction and the unemployment rate isn’t very high.

The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.

Commentary: A few banks with some questionable management practices created some discomfort when they failed earlier in the year. The Federal Reserve seeks to reassure people that the problem isn’t widespread, while acknowledging that the Committee is mindful that the policies put in place to slow inflation also tend to have a drag on the economy and that it’s keeping an eye on it.

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 maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, 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 its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.

Commentary: The Committee really wants to get inflation down to 2% annually. That’s enough inflation to encourage people to buy now while also making sure we don’t end up with runaway prices. Members have been preaching a “higher for longer” message for a while now, so the status quo is a win in itself.

However, the summary of economic projections mentioned earlier shows the potential for cuts in 2024 based on what members thought the federal funds rate would be a year from now. The federal funds rate itself is between 5.25% – 5.5%, and the projection shows 4.6%.

There are other things in here that should keep rates from falling too quickly. The Fed continues to sell its remaining stock of mortgage-backed securities (MBS).

During the pandemic, the Federal Reserve was a very active participant in the market trying to keep mortgage rates low. Having a buyer means that bonds can have lower yields, meaning lower rates. Now that the Fed is selling, the opposite is happening, and rates tend to push up.

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 labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Commentary: The Federal Reserve looks at a ton of economic data in making its projections, but the thing it’s singularly focused on right now is probably inflation and inflation expectations. If employment starts to show real signs of strain, that might change, but not yet.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Adriana D. Kugler; Lorie K. Logan; and Christopher J. Waller.

All the voting members were in agreement.