Federal Reserve Press Release In Plain English – November 2022

The Federal Reserve is focused on eliminating high levels of inflation across the economy. To that end, they raised the range for the federal funds rate another 0.75% to 3.75% – 4%. If money is more expensive, people will eventually cut back on spending, which should moderate prices.

The statement goes into greater detail. My breakdown is in bold.

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 is probably bittersweet for the Fed. On one hand, there have been gains in spending, production and employment, meaning the economy is in good shape. However, this also encourages further inflation because people will spend the extra money in their pockets, driving prices higher.

On the other hand, if the economy slows down, prices might moderate or even fall, taking care of inflation over time. It’s a catch-22.

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

There are lots of reasons for the inflation that’s happening now, but anytime there’s a conflict between nations, it can have tremendous supply chain effects. Russia is a major oil producer, so that doesn’t help gas prices that are extremely high. And because goods have to get to the store, gas affects everything else.

The other key point here is that inflation is squarely in the Fed’s crosshairs and it won’t be satisfied until the issue is vanquished.

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 3-3/4 to 4 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.

There’s a lot here, so let’s break this down nice and slow. It’s a big block of text.

The Federal Reserve would like to see annual inflation around 2%. It’s running quite a bit above that right now. The Fed’s preferred measure of inflation is the personal consumption expenditures (PCE) index. It also takes a look at the measurement excluding gas and food. We need these things, but prices tend to be volatile. Even when taking these out, inflation is 5.1% in the latest release.

It’s for these reasons that the Federal Reserve is attacking inflation two ways: rate increases and balance sheet reductions.

By raising the federal funds rate another 0.75%, the cost of borrowing gets more expensive because that’s the rate at which banks borrow overnight and it’s passed through to consumers. If it’s more expensive to borrow funds, the theory goes, people won’t spend as much and prices come down.

Officials anticipate continuing to increase the federal funds rate until they see inflation coming closer to where they want it to be. The problem is that it takes a while for the effect of rate increases to work their way through the economy. In the meantime, there is always the risk of going too far. Officials want to avoid a recession if they can.

The second thing the Fed is doing is reducing the size of its balance sheet. At the beginning of the pandemic, they were buying up billions of dollars per month in mortgage-backed securities (MBS) and treasury bills. Always having a willing buyer in the MBS market had the effect of making mortgage rates cheaper at a time when the economy needed the support.

However, with low mortgage rates come higher home prices. If borrowing is less expensive, people can afford to borrow more, driving prices higher. This contributes heavily to inflation and makes it hard for first-time home buyers to compete. Now that the process is being reversed, the market has started to cool.

If you’re in the market to buy or refinance right now, we suggest locking your rate as soon as practical if you feel you’re ready to move forward. No one has a crystal ball, but the Fed doesn’t seem in a hurry to take its foot off the brake.

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.

The Federal Reserve looks at a variety of information in making its policy decisions, but there’s no doubting that inflation is probably taking special prominence in their eyes right now. Nevertheless, Fed officials reserve the right to change course should it become necessary.

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.

Everyone was in agreement.