Federal Reserve Press Release In Plain English – May 2023

The Federal Reserve (Fed) Open Market Committee raised the target range for the federal funds rate by 0.25%, increasing from 5% to 5.25%. In normal economic times, that would be all the information you need and you could move on without reading another thing – but we aren’t living in normal economic times.

For starters, there was another bank failure last week. These are just the most visible examples of ways in which the Fed’s policy actions may be starting to cool the economy. However, there are also indications that the Fed is mindful not to go too far.

If you’re in the market to purchase or refinance, it’s a good idea to focus less on the rate and more on whether you can afford the payment and whether moving forward at this time helps you accomplish your goals. No one can predict the future, so if you like what you see, go ahead and lock your rate.

My analysis is in bold below.

Economic activity expanded at a modest pace in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.

This is the current economic readout. Nothing too terribly new here. The unemployment rate is still in very good shape, while inflation is still proving tough to tame.

You might say they’re batting .500. If the Federal Reserve were playing baseball, it would be a first ballot Hall of Famer. On the economy, they want to be doing a little better than 50/50.

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.

While employment has been relatively resilient, three banks have failed in recent months. There is no doubt that the policies of the Fed are slowing things down. Here, they acknowledge they’re trying to walk the fine line of cooling inflation without sending the economy into a deep freeze.

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 to 5-1/4 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming 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.

Short-term interest rates have been pushed up another 0.25%. While not directly tied to mortgage rates, the Fed funds rate is the rate at which banks borrow from each other overnight. If it becomes more expensive for lenders to get their hands on money, that cost is typically passed through to consumers in the form of higher rates.

However, it is worth noting that a rate hike is often priced in, meaning lenders will try to account for the interest rate adjustment before the Fed makes it, so it’s not a guarantee that mortgage rates will go up right away. Additionally, it tends to affect shorter-term financing and credit (think credit cards) more immediately and directly than longer-term financing like mortgages.

There are a couple of other things of note here. First, the Federal Reserve is continuing to sell its trove of mortgage-backed securities (MBS) built up during the pandemic to keep rates low. This would have the tendency to push rates up but is also nothing new.

This next bit is a little speculative, so take it for what it’s worth. The Fed appears to be showing additional sensitivity to the impact of their interest rate decisions. The statement says the Fed will look at “the extent to which additional policy firming may be appropriate,” but it doesn’t take it as a foregone conclusion.

The Committee wants to look at the cumulative impact of what it’s done so far when making decisions. If you’re someone who believes the Fed is close to done raising interest rates for the moment, the quoted portion and the talk of cumulative effects are what you’re relying on for evidence.

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.

This is boilerplate and hardly ever changes. Basically, the Fed is saying it will look at a wide variety of economic indicators to determine the impacts of its policy. If it sees trouble brewing, the committee would be prepared to change course.

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.

All Committee members were in agreement.