Inflation has gotten to be a real pain in the neck. At the last print, the consumer price index showed a year-to-year uptick of 8.6% in prices. This is the largest such increase in the reading since December 1981. The Federal Reserve wants to do something about it. It’s increased the federal funds rate at an even faster pace, up 0.75%.
Additionally, this is the time of the quarter where the Fed releases its latest economic projections. While forecasts are lower for gross domestic product – the most prominent measure of economic growth – they’re up for just about everything else, including both inflation and the federal funds rate.
What does all this mean for those in the market for a mortgage? If you’re ready to buy, make sure to reevaluate your budget and know what you can afford. Mortgage rates have gone up quite a bit over the past month. On the other hand, rates are up everywhere, so it could be a good time to consolidate high-interest debt.
Either way, Rocket Mortgage® can help you go over your options to get approved. My analysis of the Federal Reserve’s statement is in bold below.
Overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.
The Federal Reserve is happy with not only the number of jobs on payrolls, but with the overall drop 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 lockdowns, but energy prices have also spiked. Finally, once people are willing to pay more, businesses will charge more and prices for everything begin to go up.
The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.
While it’s evident everywhere, the single most visible example of inflation is likely highly elevated prices at the pump. Many major world powers, including the United States, have stopped buying Russian oil, but that puts pressure on other sources and capacity isn’t easily spun up.
Second, another variant of COVID-19 is causing lockdowns in China. Because so much is manufactured there, this causes major problems for the global supply chain, causing prices to rise.
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 raise the target range for the federal funds rate to 1‑1/2 to 1-3/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.
All eyes went to this paragraph in the statement first. The Federal Open Market Committee decided to drop the hammer on the inflation nail. In raising the federal funds rate range 0.75%, the Fed is hoping to discourage some borrowing, which will lead to less spending. There is also a “whatever is necessary” vibe to this paragraph.
Mortgage interest rates aren’t directly tied to the federal funds rate, but the two have a tendency to follow the same general direction. Whether rates actually go up at the time of any increase is more tied to whether the rate change has been priced in in the mortgage-backed securities (MBS) market.
Speaking of MBS, the Federal Reserve is continuing its plan to divest itself from MBS. The current rate is $17.5 billion worth of 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 this, investors have known that they could offer a lower yield because the Fed would buy anyway. With the Fed slowly exiting the market, higher yields may need to be offered on MBS in order to attract buyers. This would push mortgage rates up. It’s something to watch.
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.
In this paragraph, the Fed always runs down what they look at in order to make their monetary policy determinations. However, special emphasis is being placed on the fact that the Fed will adjust policy as appropriate. If inflation continues to rise, they could get more aggressive. If inflation comes back down and the economy seems to be slowing, they could move in the other direction. It all depends.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Lisa D. Cook; Patrick Harker; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller. Voting against this action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate by 0.5 percentage point to 1-1/4 percent to 1-1/2 percent. Patrick Harker voted as an alternate member at this meeting.
There was some disagreement within the Committee as Esther George preferred to take things slower on rate hikes, voting for a smaller 0.5% increase.
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