Federal Reserve Statement Explained – July 2024

The Federal Reserve left rates where they were at the conclusion of yesterday’s meeting. Because mortgage rates are projected into the future and the market has been expecting a move in September, it may not be a bad time to make a move to buy a home or refinance if you’re ready.

The devil is always in the details. My analysis of the Federal Open Market Committee’s latest statement is below, labeled and bolded.

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderated, and the unemployment rate has moved up but remains low. Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the Committee's 2 percent inflation objective.

Commentary: The job market is slowing down and slightly more people are out of work. However, inflation is moving closer to where the Federal Reserve would like to see it. Unfortunately, one of the ways inflation has traditionally come down is unemployment rising, because prices come down when people spend less.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.

Commentary: The Fed has two main goals that work in opposition to each other: maintaining maximum employment and keeping inflation at a reasonable level. The problem with this is that being employed and having money in your pocket contributes to inflation because people are willing to pay higher prices.

The unemployment rate rising slightly, but not too much, is likely what the Fed wants. Committee members would like to get inflation down to 2% annually, which is seen as enough to stimulate the economy by encouraging people to buy now, but not so much that the money people currently have is substantially diminished.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective.

Commentary: The Fed left the current federal funds rate unchanged at 5.25% – 5.5%. Committee members are really reiterating the idea that they don’t want to drop the target for the rate until they have real confidence that the economy is well down the path to 2% inflation.

This matters for mortgages because mortgage rates and the federal funds rate tend to move in the same general direction. It’s worth noting that because mortgages are sold a couple of months after the fact, the rates you get now are projected into the future.

That’s important because up to this point, the Federal Reserve has been projecting at least one cut in the rate range this year and the market expects it will come at the next meeting in September. So if your finances are ready, it may not actually be a bad time to lock your rate.

The Federal Reserve is also selling off its stock of mortgage-backed securities (MBS). When the Federal Reserve is buying securities, rates tend to go down because the rate of return doesn't have to be as high to attract a buyer. When the Federal Reserve is selling, other investors have to step in and buy MBS. Mortgage rates are driven up as investors demand a higher premium. However, because the Federal Reserve has sold its securities in a scheduled and predictable fashion, price movements are built into rates at this point. You're not seeing wild swings.

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 labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

The Fed monitors a great deal of incoming information in assessing the state of the economy to make its decisions. Although it’s been more heavily influenced by inflation for a while now, the labor market is a key indicator that it needs to drop rates to bring things back into balance.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Austan D. Goolsbee; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Austan D. Goolsbee voted as an alternate member at this meeting.

Commentary: All were in agreement.