Federal Reserve Press Release In Plain English

Originally published: September 2022

Inflation is not coming down as fast as the Federal Reserve would like it to be. That much is clear. To that end, the Federal open market committee (FOMC) raised short-term interest rates by 0.75% in September, matching the last couple of federal funds rate increases.

The Fed has done what many in the markets expected them to do in the present, but four times a year, the Fed gives us a look at the projections of the Committee members for the future of the economy. If you’re trying to read the tea leaves, this is the most interesting part to look at.

The projections show that policymakers anticipate the federal funds rate ending up as high as 4.4% by the end of 2022. In 2023, the Fed funds rate is anticipated to be around 4.6% before falling back to 3.9% in 2025 and falling slightly from there.

Why does all of this matter? There are multiple factors that have caused the dramatic increase in inflation, but the one the Fed has control over is demand. You control demand by making it relatively more expensive for people to spend money. You do that by increasing the interest rate to borrow funds. In theory, this causes people to hang on to the money they have and not spend it as freely, bringing down prices.

Unlike other interest rates, rates for mortgages aren’t directly impacted by the federal funds rate, but rather the demand for and return on mortgage-backed securities (MBS). However, they do tend to follow the same general direction because investors in MBS will expect higher interest rates if they are getting higher interest everywhere else.

If you’re in the market to buy or refinance a home, the takeaway in the short term is that rates will continue to be at elevated levels relative to a few years ago. This means you should lock your rate as soon as possible when you see one that you like.

If you’re in the market to buy a home, we highly recommend that you take advantage of the couple of our current product offerings. RateShield^® allows you to lock your rate for up to 90 days while shopping for a home.¹ You can move down to a lower rate once during that time should rates fall.

With all that out of the way, let’s get to what the Fed said. My analysis is 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.

“Modest growth” in spending is the opposite of what the Fed wants at this point. The primary way for companies to get the signal that prices are too high would be for people to stop spending on goods and services at high levels. That hasn’t happened yet and inflation continues to be rampant.

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.

In response to international sanctions over its attack on Ukraine, Russia has cut off supplies of oil and natural gas. Natural gas levels are a bigger concern in Europe where households are going to be figuring out how to get by this winter on sharply limited supplies.

In the U.S., it’s impacted oil supply and caused actions to open up domestic drilling in order to bring down the price of gasoline. In the most recent Consumer Price Index for September, gas prices were down 10.6% on a seasonally adjusted basis, but prices have risen 25.6% for gas over the same time a year ago.

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 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate. 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.

This is the paragraph every analyst looks at first, and there’s also a lot going on here. I’m going to break this into about three paragraphs.

First, the Committee members reiterate that over the long term, they would like to see inflation be at a rate around 2%. It’s like having the right dose of medicine. A little bit of inflation encourages people to buy now in anticipation that prices will be higher in the future. Right now, it’s just too much. If this was medicine, the economy is high as a kite.

In an effort to bring inflation back down to Earth, the Fed has raised the federal funds rate 0.75% to a range of 3% – 3.25%. This alone will push up interest rates.

We’ve said that the federal funds rate doesn’t impact mortgage-backed securities, but the Fed does hold the largest share of mortgage-backed securities of any investor because they were trying to keep mortgage rates down to stimulate the economy. However, low mortgage rates also contributed to higher home prices, which doesn’t help inflation.

As a result, the Fed is now selling their MBS. This should also contribute to mortgage rates rising because other investors will expect a higher yield.

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 factors when it comes to making rate decisions. However, the ones it’s really focused on right now are inflation pressures and expectations. Inflation expectations are important because if people continue to believe prices will rise at a high rate, they’ll continue to spend at elevated levels, which drives up inflation.

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.

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