The Federal Reserve in many ways chose to keep the pedal to the metal in its latest statement yesterday. It’s going to continue with its current set of measures to support the economy. However, that’s not to say officials won’t be ready to tap the brakes as necessary.
Every few months, the Federal Reserve releases something often referred to by economic analysts as the “dot plot.” The dot plot takes a look at where the Fed governors see the economy going in the short, medium and longer-term for a range of indicators including the unemployment rate, inflation levels and the short-term federal funds rate.
It’s this last indicator that analysts are laser focused on. Essentially, with inflation showing a rise in the last couple months given all the economic stimulus that has been pumped into the economy, there are questions as to whether the Fed needs to raise short-term rates to combat potentially high price increases.
The Fed has been consistent in its belief that more rapid inflation is a temporary problem. “Transitory” is the new buzzword of the year among economic analysts. There’s also the feeling that some of this has to do with prices being very low on so many things for a long time because of the pandemic throwing off comparisons.
The one nod to the Fed slowing down things slightly faster than they otherwise would have comes in the prediction for the federal funds rate in 2023, where short-term interest rates are predicted to be 0.6%, up from an average of 0.1% last prediction. This is important because the federal funds rate tends to follow the same general direction as longer-term rates.
If you’re looking to get a mortgage, you should know that nothing in this statement points to imminent change and 2023 is a long time away. However, as the economy gets back to normal and people are feeling better about the future, investment could move away from bonds and into stocks, causing rates to move higher. If you see a rate you like and you’re ready, don’t hesitate to apply for a mortgage.
My translation of Fed-ese is in bold.
The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.
This has been standard language since the beginning of COVID-19’s effects on the economy. Still, it’s nice to know officials are supporting where they can.
Progress on vaccinations has reduced the spread of COVID-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors. 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.
Progress has been uneven, but things are slowly getting better. Prices have gone up, but the Fed still isn’t overly worried about this given some of the points we touched on above. The Fed says that conditions are such that it’s relatively easier to borrow money and get credit right now for both households and businesses. Investment has the ability to kickstart the economy.
The path of the economy will depend significantly on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.
While things are getting better (the ability to see even bad baseball is super cool), it’s important to know that we aren’t out of the woods yet. The virus can still pose trouble for the economy in the future, so it’s worth keeping an eye on.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
That’s a lot of words to digest. Let me split that one paragraph into three.
The Federal Reserve starts by talking about inflation, which I think is appropriate given that’s all anyone is talking about right now. The goal over the long-term is 2% inflation per year. That’s just enough inflation to encourage people to buy now while not being so large that it makes your money worthless. Inflation is running a little hot right now, but it’s been so low and below target for so long that the Fed is kind of cool with that.
Next, they move to the federal funds rate, which is unchanged in the range between 0% – 0.25%. This was expected and more eyes were on the dot plot and the future predictions we talked about earlier. They want to keep the rate where it is until maximum employment is achieved and inflation has exceeded 2% for a bit.
The Fed also renewed its commitment to purchase $80 billion worth of Treasury securities per month and $40 billion worth of mortgage-backed securities (MBS). The MBS point is huge because the Fed is the biggest buyer of the securities right now that are tied to the vast majority of American mortgage rates. Because the Fed is a big buyer, the yield doesn’t have to be as high to attract an investor. Because of this, mortgage rates are lower than they otherwise would be.
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 just a paragraph where the Fed tells us everything it looks at in making its decisions. Inflation is going to be something they keep a real eye on with all the economic stimulus that was injected. Also, developments regarding the virus can’t be ignored.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.
The Committee members all agreed!
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