Federal Reserve Statement Explained – September 2024

The Federal Reserve cut its federal funds rate target by 50 basis points – 0.5% for those who don’t speak finance. This is the first cut since the beginning of the pandemic. Before that, there had been 11 straight increases as the Fed tried to get inflation under control. Now the pendulum is swinging back to thinking about the labor market.

The Federal Reserve also makes predictions at this meeting about where it sees the economy and the federal funds rate going over the medium- and long term.

What’s really exciting if you’re in the mortgage market right now is that the Federal Reserve sees the federal funds rate for 2024 being roughly 0.7 points lower than they did in June.

Moreover, there’s been a lowering of the projected federal funds rate both over the medium- and long term. It’s not directly tied to mortgage rates, but they tend to follow the same general path.

This is unequivocally good news. With that said, just as the Fed has changed its mind since it’s June projections, they can also change their thinking moving forward, so it’s important that you lock your rate now if you’re ready to buy or refinance and you like the rate you see. Let’s get into the statement analysis. My commentary is both bold and labeled.

Federal Reserve Statement Analysis

In this analysis, the words of the Federal Reserve paragraphs will be followed by my commentary.

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee's 2 percent objective but remains somewhat elevated.

Commentary: This is the paragraph where the Federal Open Market Committee (FOMC) gives us its temperature check on the economy. Overall, things are good, but jobs aren’t being added at the same pace they were, and unemployment has started to move up. Inflation is still on the high side, but progress is being made.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.

Commentary: The Fed is in charge of balancing two goals that are often somewhat in conflict with one another. The first is to achieve conditions that enable the maximum amount of employment throughout the economy and the second is stable prices.

You tackle inflation by raising interest rates, but that also makes borrowing harder for businesses and they may also lay off employees if consumers are spending less due to money being more expensive to borrow. When rates are lowered, that can be good for employment, but inflation can rise. It’s a tightrope.

In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

Commentary: This is the portion of the statement that all mortgage bond traders read first in determining what the price should be for the mortgages they sell to investors in the near term before the next Fed meeting. In this case, it’s a confirmation for those who were betting on a rate cut of 0.5%.

Timing is something we don’t talk about a ton, but it’s an important point to make in this case. Whether rates fall or rise on the day of the Fed announcement has very little to do with the announcement itself. Rather, traders are very keen to see the Fed’s current projections for the future.

The reason for this is that mortgages are typically sold to investors in the secondary mortgage market 60 days or more after the loan closes. So the rate you get today is always based on a projection of future rates. This is why it’s so important that the federal funds rate projections were lower across the board. This is a good sign for those hoping for lower rates.

The Federal Reserve did mention it plans on continuing to sell off its existing inventory of mortgage-backed securities, which would tend to push rates up because buyers other than the Federal Reserve who would fill that gap tend to demand higher yields, but the selloff is scheduled and already accounted for in rates.

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 Fed gives us a sample of everything it looks at in making its decision regarding the federal funds rate. It’s an extensive list and the Committee is very data-driven. One thing worth noting is that now that Committee members feel that inflation is coming closer to control, they may place more weight on labor market readings and slightly less on inflation data.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Lisa D. Cook; Mary C. Daly; Beth M. Hammack; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Voting against this action was Michelle W. Bowman, who preferred to lower the target range for the federal funds rate by 1/4 percentage point at this meeting.

Commentary: We have some dissension on the Committee for the first time in quite a while. Michelle Bowman still wanted to lower the target range, but preferred to do so by only 0.25%. We won’t have indicators on what individual members of the voting body were thinking until the meeting minutes are released in a matter of weeks.