Federal Reserve Press Release In Plain English – January 2022

The Federal Reserve didn’t make any changes to its policy in terms of interest rates or mortgage bonds, but it teed up the potential for movement very soon. Because the Fed specializes in econo-speak, we’ve tried to put an analysis in plain English below.

Federal Reserve Chair Jerome Powell said that the Fed is leaning toward raising the federal funds rate at its March meeting. If there’s a key takeaway, it’s this: If you’re in the market for a loan and you’re ready to move forward, now might be a good time to make your move.

My analysis is below in bold.

Indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months but are being affected by the recent sharp rise in COVID-19 cases. Job gains have been solid in recent months, and the unemployment rate has declined substantially. Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The first thing to take notice of is what’s not there. The boilerplate language on support of the economy during COVID-19 has been removed. This would point to more of a normalization of policy. The Committee will get there in a minute.

This is typically the status update paragraph. Overall, the report is pretty good. Some sectors are being hard-hit by the pandemic still as there’s been a bigger uptick in COVID-19 cases across the country. It’s not necessarily a great time to be in the travel industry. However, the unemployment rate overall is down, nearing pre-pandemic levels.

The biggest boogeyman in the room right now for the Fed is inflation, which continues to run hot. That’s something to continue to keep an eye on throughout the year.

The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus.

Just because we’re learning to better handle it doesn’t mean that COVID-19 is in the rearview mirror. This paragraph acknowledges that the path of the economy and the Federal Reserve’s response to it could change as things develop with the virus.

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 keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March. Beginning in February, the Committee will increase its holdings of Treasury securities by at least $20 billion per month and of agency mortgage‑backed securities by at least $10 billion per month. The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

The Committee chose to keep short-term interest rates where they were … for now. This is pretty well telegraphed here that the Fed expects to make a move with the federal funds rate, likely at its next meeting in March. A rise in this rate would tighten the money supply somewhat to help tamp down inflation.

Additionally, the Federal Reserve is winding down its program purchasing treasury and mortgage-backed securities (MBS). Backing off these policies gives the Fed a tool to respond in the event of a future economic crisis.

For consumers, the downside of both of these moves means that it will become relatively more expensive to get a mortgage or any other type of loan. Let’s start with the impact of a short-term interest rate hike. Depending on what you read, analysts expect three or four rate rises this year.

The federal funds rate is the rate at which banks borrow money from each other overnight. When it cost them more to get money, that cost is passed on to consumers. The most immediate impact is on the shortest-term borrowing in terms of interest rates for things like credit cards and short-term personal loans, but it’s felt for things like mortgages as well.

Additionally, the Fed had been purchasing MBS in large quantities because housing and related industries associated with it make up a large percentage of the economy. Because the Fed has been such a large buyer in the market, yields and thus interest rates don’t have to be as high to attract a buyer for mortgage bonds. As these purchases drop off, yields will likely have to rise in order to attract a buyer.

If you’re in the market to buy a home or refinance and you’re financially ready, you should consider applying now to take advantage of today’s great 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 public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

The Committee takes a look at several different factors in making its policy decisions. Public health is a relatively recent addition to these indicators as a result of the pandemic. However, labor market conditions have always played a big role and inflation is very high at the moment relative to normal levels. The Fed will be subjecting this to special scrutiny.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Esther L. George; Patrick Harker; Loretta J. Mester; and Christopher J. Waller. Patrick Harker voted as an alternate member at this meeting.

There was consensus.

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