Federal Reserve Plain Language Press Release – June 2022

Inflation has become a real pain in the neck. At the last draw, the consumer price index showed an annual price increase of 8.6%. This is the largest such increase since December 1981. The Federal Reserve wants to do something about it. It raised the fed funds rate at an even faster pace, up 0.75%.

Moreover, this is the time of the quarter when the Fed releases its latest economic projections. While forecasts are lower for gross domestic product — the most important measure of economic growth — they are up for just about everything else, including inflation and the federal funds rate.

What does all of this mean for those looking for a mortgage? If you’re ready to buy, be sure to reevaluate your budget and know what you can afford. Mortgage rates have risen a little over the past month. On the other hand, rates are rising everywhere, so it could be a good time to consolidate high-interest debt.

Anyway, Rocket Mortgage® can help you review your options for obtaining approval. My analysis of the Federal Reserve statement is in bold below.

Overall economic activity appears to have picked up after a slight dip in the first quarter. Job creations have been robust in recent months and the unemployment rate has remained low. Inflation remains elevated, reflecting pandemic-related supply and demand imbalances, rising energy prices and broader price pressures.

The Federal Reserve is pleased not only with the number of jobs on the payroll, but also with the overall decline in the unemployment rate. The bull in the china shop right now is inflation. Supply and demand continue to be an issue due to COVID-19 related lockdowns, but energy prices have also increased. Finally, once people are willing to pay more, companies will charge more and prices for everything will start to rise.

Russia’s invasion of Ukraine is causing enormous human and economic hardship. The invasion and related events create additional upward pressure on inflation and weigh on global economic activity. Additionally, COVID-related lockdowns in China are likely to worsen supply chain disruptions. The Committee pays close attention to inflation risks.

Although evident everywhere, probably the most visible example of inflation is very high prices at the pump. Many major world powers, including the United States, have stopped buying Russian oil, but this puts pressure on other sources and capacity is not easily increased.

Second, another variant of COVID-19 is causing lockdowns in China. Because so much is made there, it poses major problems for the global supply chain, driving up prices.

The Committee seeks to achieve a maximum employment and inflation rate of 2% in the long term. In support of these objectives, the Committee has decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4% and anticipates that continued increases in the target range will be appropriate. In addition, the Committee will continue to reduce its holdings of Treasuries, agency debt and agency mortgage-backed securities, as described in plans to reduce the size of the Federal Reserve’s balance sheet released in may. The Committee is firmly committed to bringing inflation back to its target of 2%.

All eyes first turned to this paragraph of the statement. The Federal Open Market Committee decided to drop the hammer on the high point of inflation. By raising the federal funds rate range by 0.75%, the Fed hopes to discourage some borrowing, which will lead to lower spending. There is also an “all that is necessary” vibe to this paragraph.

Mortgage interest rates are not directly related to the federal funds rate, but both tend to follow the same general direction. Whether rates actually rise at the time of any increase is more related to whether the rate change has been priced into the mortgage-backed securities (MBS) market.

Speaking of MBS, the Federal Reserve is continuing with its plan to divest from MBS. The current pace is $17.5 billion in sales per month and it will eventually increase in the coming months to $35 billion.

The Fed has been a big player in this market and because of that, investors knew they could underperform because the Fed would buy anyway. With the Fed’s slow exit from the market, higher yields may need to be offered on MBS to entice buyers. This would push up mortgage rates. It’s something to watch out for.

In assessing the appropriate monetary policy stance, the Committee will continue to monitor the implications of new information on the economic outlook. The Committee would be ready to adjust the monetary policy stance, if necessary, if risks appear that could hinder the achievement of its objectives. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflationary pressures and inflation expectations, as well as financial and international developments.

In this paragraph, the Fed always analyzes what it is looking at in order to make its monetary policy decisions. However, particular emphasis is placed on the fact that the Fed will adjust its policy accordingly. If inflation continues to rise, they could become more aggressive. If inflation comes back down and the economy seems to be slowing down, they could go the other way. Everything depends.

Voting for monetary policy action was Jerome H. Powell, chairman; John C. Williams, Vice President; Michelle W. Bowman; Lael Brainard; James Bullard; Lisa D. Cook; Patrick Harcker; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller. Esther L. George voted against that action, preferring at that meeting to raise the target range for the federal funds rate by 0.5 percentage points to 1-1/4 percent to 1-1/2 percent. Patrick Harker voted as an alternate member at this meeting.

There was some disagreement in the Committee as Esther George favored slowing rate hikes, voting for a smaller 0.5% increase.

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About Evelyn C. Heim

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