Federal Reserve Press Release in Plain English – March 2022

The Federal Reserve chose to raise interest rates for the first time since the beginning of the pandemic in an attempt to get inflation under control. That much was expected. What’s more interesting is that once per quarter, the Federal Reserve releases economic projections.

One of the items projected into the future is the federal funds rate. What’s really interesting is that the projection for 2022 now stands at 1.9%. In order to get to the 1.75% – 2% range, six more rate increases would be necessary if the Fed keeps up its preference for raising rates in 0.25% increments. It just so happens there are six meetings left.

If you’re in the market to buy or refinance a home and you’re ready, the time to make a move is now. Geopolitical uncertainty will have a role, but rates are likely to rise throughout the rest of the year. Lock in your rate!

My analysis of the press release itself is in bold below.

Indicators of economic activity and employment have continued to strengthen. Job gains have been strong in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.

On balance, the economy is doing pretty well and unemployment is low. With that said, the Fed is seriously concerned about current inflation levels. Of course, prices are going up all over the place, but the energy reference is new. More on that in a minute.

The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.

Governments across the world are making moves to ensure that Russia feels the economic pain of their actions and have done things like imposed sanctions and stopped buying Russian oil. Of course, part of the issue is that Russia is one of the world’s major oil producers. This is why your pocketbook is quite a bit lighter after visiting the pump recently.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.

Inflation is running incredibly hot right now. In order to get it under control, the main tool the Federal Reserve has is the ability to raise the federal funds rate. They increased the target range for this by 0.25% to 0.5% – 0.75%. As money gets more expensive for banks to borrow, they hold onto more money.

There are two big impacts of this. On one hand, interest rates are likely to go up, including those for mortgages and personal loans. On the other, the money you currently have in the bank should be worth more. As rates start to rise, you could start earning more money on your savings account.

If you’re in the market for a mortgage, in addition to the fed funds rate increase, the other thing to keep a close eye on is its upcoming selloff of mortgage-backed securities (MBS). For many years at this point, the Federal Reserve has been the biggest buyer of MBS by far.

This practice of buying MBS has held mortgage rates down. If there is a ready buyer in the market, the rate of return doesn’t need to be as high to attract investment. As the Federal Reserve begins to sell off its holdings, some other buyer will have to step into the market. Because no one is likely to do that without getting a higher rate of return, it’s very likely that interest rates go up as a result of the selloff.

Bottom line, if you’re ready to make a move and you see a rate you like, take advantage of it. Lock that rate.

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.

This is the paragraph in which the Fed goes over all the data and news the Committee looks at in making its monetary decisions. The main thing that I take out of here is that the list just seems to get longer and longer with each passing month.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller. Voting against this action was James Bullard, who preferred at this meeting to raise the target range for the federal funds rate by 0.5 percentage point to 1/2 to 3/4 percent. Patrick Harker voted as an alternate member at this meeting.

This is a bit of a rarity now. Usually there’s unanimity. However, St. Louis Federal Reserve President James Bullard wanted to move the rate increases forward faster by kick-starting it within 0.5% increase as opposed to the 0.25% increase the Committee agreed on.

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