The Federal Reserve has, in many ways, chosen to keep the pedal to the metal in its latest statement yesterday. It will continue with its current package of measures to support the economy. However, that doesn’t mean officials won’t be ready to step on the brakes if necessary.
Every few months, the Federal Reserve releases what economic analysts often call the “dot plot”. The dot plot examines where Fed governors see the economy in the short, medium, and long term for a range of indicators, including the unemployment rate, inflation levels, and the short-term fed funds rate.
It is on this last indicator that analysts are laser-focused. Essentially, with inflation shows an increase Over the past two months, given all the economic stimulus that has been pumped into the economy, questions have arisen as to whether the Fed should raise short-term rates to fight potentially high price hikes.
The Fed has always believed that faster inflation is a temporary problem. “Transient” is the new buzzword of the year among economic analysts. There is also the feeling that this is partly due to the fact that prices are very low on so many things for a long time because of the pandemic which has caused comparisons to fail.
The only nod to the Fed slowing things down a bit faster than they otherwise would have come from the forecast for the fed funds rate in 2023, where short-term interest rates are expected to be at. 0.6%, against an average of 0.1% the last forecast. . This is important because the fed funds rate tends to follow the same general direction as long-term rates.
If you are looking to secure a mortgage, be aware that nothing in this statement indicates an imminent change and that 2023 is far away. However, as the economy returns to normal and people feel better about the future, investments could move away from bonds and into stocks, which would cause rates to rise. If you see a rate that appeals to you 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 US economy during these difficult times, thereby promoting its maximum employment and price stability goals.
It has been standard language since the effects of COVID-19 on the economy began. Still, it’s good to know that officials support where they can.
Advances in vaccination have reduced the spread of COVID-19 in the United States. Amid this progress and strong political support, economic activity and employment indicators have strengthened. The sectors most affected by the pandemic remain weak but have shown improvement. Inflation has increased, largely reflecting transient factors. Overall financial conditions remain accommodative, partly reflecting policy measures aimed at supporting the economy and the flow of credit to US households and businesses.
Progress has been patchy, but things are slowly improving. Prices have gone up, but the Fed is still not too worried about it given some of the points we covered above. The Fed says the conditions are such that it is relatively easier to borrow money and get credit right now for households and businesses. Investment has the capacity to revive the economy.
The trajectory of the economy will depend significantly on the evolution of the virus. Advances in immunization are likely to continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.
As things improve (the possibility of even seeing bad baseball is super cool), it’s important to know that we’re not out of the woods yet. The virus can still pose problems for the economy in the future, so it is worth watching out for.
The Committee seeks to achieve a maximum employment and inflation rate of 2% in the longer term. As inflation has remained below this longer-term target, the Committee will aim to keep inflation slightly above 2% for a period of time, such that inflation averages 2% over time and that long-term inflation expectations remain firmly anchored at 2%. The Committee expects to maintain an accommodative monetary policy until these results are achieved. The Committee has decided to maintain the target range for the federal funds rate at 0 to 1/4 percent and expects it to be appropriate to maintain this target range until labor market conditions. have reached levels consistent with the Committee’s estimates of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% 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 agency mortgage-backed securities by at least $ 40 billion per month until that further substantial progress has been made towards employment and the Committee’s maximum price. stability objectives. These asset purchases help promote the smooth functioning of markets and supportive financial conditions, thus supporting the flow of credit to households and businesses.
It’s a lot of words to digest. Let me divide this paragraph into three.
The Federal Reserve starts off by talking about inflation, which I think is appropriate given that that’s all everyone is talking about right now. The long-term goal is 2% inflation per year. It’s just enough inflation to encourage people to buy now while not being so big that it makes your money worthless. Inflation is a little hot right now, but it’s been so low and below target for so long that the Fed is pretty cool with it.
Then they switch to the federal funds rate, which remains unchanged in a range of 0% to 0.25%. It was expected and more eyes were on the dot plot and future predictions we talked about earlier. They want to keep the rate where it is until maximum jobs are reached and inflation has been above 2% for a while.
The Fed also renewed its commitment to buy $ 80 billion in treasury securities per month and $ 40 billion in mortgage-backed securities (MBS). The MBS point is huge because the Fed is currently the biggest buyer of securities tied to the vast majority of US mortgage rates. Because the Fed is a big buyer, the return doesn’t have to be that high to attract an investor. For this reason, mortgage rates are lower than they would otherwise be.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of the information received for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy if necessary if any risks arose that could impede the achievement of the Committee’s 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, 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 that they are really watching with all the economic stimulus that has been injected. In addition, developments regarding the virus cannot be ignored.
Jerome H. Powell, chairman, voted for monetary policy action; John C. Williams, vice-president; Thomas I. Barkin; Raphaël W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.
Committee members all agree!
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