Federal Reserve Press Release Plain English – July 2021

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federal reserve update

The Federal Reserve yesterday left short-term interest rates unchanged in its latest policy statement. However, they have made some statements about their purchases of Mortgage Backed Securities (MBS), which may affect mortgage rates. Bottom line: if you see a bet that you like and you are ready, it’s time to take advantage and apply now

My analysis is in brave

The Federal Reserve is committed to using its full range of tools to support the US economy during this challenging time, thereby helping to achieve its goals of maximum employment and price stability.

The Fed has tried its best to make one of these statements each time since COVID-19 began reaffirming its intention to use every tool at its disposal to support the ongoing economic recovery.

Thanks to progress in vaccinations and strong political support, rates of economic activity and employment continued to improve. The sectors hardest hit by the pandemic are seeing improvement, but have not fully recovered. Inflation has risen, largely due to transition factors. Overall financial conditions remain favorable, partly reflecting policies to support the economy and the flow of loans to US households and businesses.

Given the vaccine rollout and continued political support, as well as financial support from other government areas, there are some really good indicators that the economy is steadily picking up steam. Everyone talks about inflation, and the Federal Reserve does not live under a rock.

However, the Committee continues to argue that inflation is temporary, which means that it should slow down as supply chains return to normal when there is now no such flow of goods and services, where people are slowly returning to life outside their homes. … This is also a bit deceiving because for some time, starting in March last year, there has been less demand.

The economic path continues to depend on the spread of the virus. Progress in vaccination is likely to continue to diminish the economic impact of the public health crisis, but risks to the economic outlook remain.

The virus continues to dictate politics and just flaunts it altogether. We are certainly not out of the woods yet, and it is good to see that this paragraph is a confirmation of this. If anything changes, the Federal Reserve will update the policy to reflect those changes.

The committee aims to achieve maximum employment and inflation of 2 percent over the long term. As inflation consistently falls below this long-term target, the Committee will aim for inflation to moderately exceed 2 percent for some time, so that inflation averages 2 percent over time and long-term inflation expectations remain stable at 2 percent. The Committee expects to maintain a moderate monetary policy until these results are achieved. The Committee 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 reach levels in line with the Committee’s estimates of maximum employment and growth. inflation. up to 2 percent and may moderately exceed 2 percent for some time. Last December, the committee indicated that it would continue to increase its holdings of at least $ 80 billion in Treasuries per month and mortgage-backed agency securities at least $ 40 billion per month until substantial further progress will be made towards its maximum employment and the goal of price stability. Since then, the economy has made progress towards these goals, and the Committee will continue to assess progress in upcoming meetings. These asset purchases help ensure smooth market operations and favorable financial conditions, thereby supporting the flow of credit for households and businesses.

There is so much going on in this paragraph that the huge block of text is almost overwhelming. Not that Chairman Powell needs my writing advice, but three to five lines of text per paragraph is a good goal. Okay, you came for economic analysis, not my writer’s soapbox. Let’s deal with this.

First, the goals of the Fed are summarized. The committee would like to keep long-term inflation at 2% annually. Since inflation has stayed low for so long, they don’t really mind if inflation rises above 2% for a while. It is well above that level right now, but the Fed sees it falling again over time.

Given this market, the Committee decided to keep short-term interest rates unchanged in the range from 0% to 0.25%. Short-term interest rates have the greatest direct impact on revolving debt, like credit cards, but they also affect longer-term rates on things like mortgages. Basically, the lower the better.

Since December, the Federal Reserve has been buying $ 40 million in Treasury bonds and $ 80 billion in MBS. This makes the Fed the largest player in the MBS market.

MBS trading directly affects mortgage interest rates. In fact, when there are many buyers for a security, the rates can be lower because the yield does not have to be so high to attract a buyer. If buyers are converting money into higher yields, riskier investments like stocks, yields and MBS rates must rise to attract a buyer.

We’re in a situation where the Fed is buying so much MBS that that alone is helping to lower mortgage rates. If the Fed leaves without a major buyer or buyers to fill the gap, it is possible that rates will rise.

This is the first time that the Committee has mentioned an assessment of progress and a reassessment of this policy. At this point, no one but the Fed knows its timing, but if you are in doubt about buying or refinancing and you like the interest rate you see, this is a great time to take action. Nobody can predict the future.

In assessing the appropriate monetary policy stance, the Committee will continue to monitor the implications of this information for the economic outlook. The Committee will be ready, if necessary, to adjust the course of monetary policy if risks arise that may interfere with the achievement of the Committee’s objectives. The Committee’s assessments will take into account a wide range of information, including data on public health, labor market conditions, inflationary pressures and inflation expectations, as well as financial and international developments.

Here the Fed is simply talking about what they base their decisions on. In addition to the fact that inflation is mentioned twice, the health of the population is of paramount importance at the moment. It’s always good to know that they are looking at a wide range of data.

Voted for monetary policy measures Jerome H. Powell, chairman; John K. Williams, Vice Chair; Thomas I. Barkin; Raphael V. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida Mary K. Daley; Charles L. Evans Randal K. Quarles; and Christopher J. Waller.

The committee members agreed.

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