Federal Reserve Press Release In Plain English – July 2023

The Federal Open Market Committee (FOMC) of the Federal Reserve chose to raise the target range of the federal funds rate 0.25% to between 5.25% – 5.5%. Other than that, exactly five words changed in this statement. This was a bit telegraphed, and the Fed continues to focus squarely on inflation.

If you’re looking to buy or refinance, it’s true that this tends to push rates up for mortgages, but if you’re looking to buy, the rate may not matter as much as your needs and your monthly payment. On the refi side, your equity can really help with debt consolidation, because every other rate also rises and mortgage rates tend to be lower.

If you’re interested in getting started, you can apply online. In the meantime, we’ll translate the economics jargon. My analysis is in bold.

Recent indicators suggest that economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.

The Fed always starts by giving you a review of what it looked at in the time since the last announcement. The report card reads pretty well, but inflation is still concerning. As long as job gains keep up, it’s a good bet the Committee will remain laser-focused on attacking inflation.

The U.S. banking system is sound and resilient. Tighter 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.

The policy of higher interest rates to tackle ever-rising prices hasn’t been without its collateral damage. Some banks did fail, and the combination of higher interest rates and more conservative lending policies are likely to make credit harder for some people to get. The Fed is trying to strike a delicate balance.

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 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 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.

While the first two paragraphs provide nice context, the eyes of seasoned observers go directly here. This paragraph is the one that tips the scales of so much finance in the U.S. Here, the Federal Reserve has chosen to raise rates 0.25%, for the 11^th increase since March 2022.

This was very much expected by analysts. The Federal Reserve releases projections once a quarter. When these were released after the last meeting, two more increases were projected before the end of the year. This has the effect of pushing rates up for everything from mortgages to credit cards and auto loans.

A brief refresher on why the Fed funds rate matters: It’s the target rate at which banks borrow money from each other overnight. If it gets more expensive for banks to borrow money, this is passed through to consumers. If money is harder to get, the theory goes, consumers spend less, pushing prices down.

The Fed is also slowly selling off its holdings of mortgage-backed securities (MBS). The yields on MBS have a major influence on rates available in the market. The Fed exiting means someone else has to buy those mortgage bonds. Because other investors demand better return, rates push higher.

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.

While the Federal Reserve does look at all kinds of data detailed in the above paragraph, it would be a fair estimate to say inflation has been occupying about 97% of the FOMC’s attention based on their public comments.

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; Lorie K. Logan; and Christopher J. Waller.

The Committee members were in agreement.