Three Key Takeaways From The Fed’s Meeting Minutes
January 6, 2023
3 Key Takeaways From The Fed’s Meeting Minutes
- Inflation is not under control
- The Fed is committed to raising rates until it is, even if it means increasing the hikes
- The market doesn’t know what it’s talking about when interpreting Fed moves
The Federal Reserve released the minutes from their December meeting. As expected, and in line with previous comments from Fed Chairman Jerome Powell, they are committed to raising rates for "some time" until inflation is on a clear path towards their 2% target, which is still a ways away.
Due to persistent and unacceptably high inflation, policymakers raised their key interest rate 50 basis points and reaffirmed the importance of maintaining this restrictive monetary policy until inflation is under control–pretty much the same thing they’ve been saying since they started raising rates last year.
In addition to cautioning against premature pull backs, meeting minutes stated, “Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time.”
With an aggressive policy not seen since the 90’s, the Fed increased their benchmark rate 75 basis points four consecutive times in a row for a total federal funds rate of 4.25%-4.5%, the highest level in 15 years. This hawkish policy by the Fed is a response to consumer prices pain being felt everywhere, from the cost of housing to groceries.
Officials stressed the importance and need to maintain a policy approach of “flexibility and optionality” as they stayed focused on new data moving forward. Officials also said the public shouldn’t misinterpret their decisions or read too much into rate-settings by the Committee; or think they'll swith to lower rates hikes at any time. They also indicated that all options are still on the table and a reversal of policy could be implemented should the data support a larger hike.
Although Chairman Powell said progress battling inflation has been made, he expects rates to hold at higher levels after the increases end meaning a new cost of credit reality could be upon the markets. This will have a negative impact on homeownership affordability and consumer credit; but could also reign in home values more in line with area median income.
“A number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee’s resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path,” the minutes said.
Meeting minutes also reflected a general sentiment that the committee doesn’t expect any rate cuts this year, in 2023, even though market pricing certainly believes the worst is behind us. The personal consumption expenditures price index (without food and energy), the Fed’s go-to data point, was at 4.7% annually in November, which is down from a peak of 5.4% in February 2022, although still well above the 2% target of the Fed.
Source: St. Louis Fed
A 2023 Recession
Just about every CEO and economist expects the economy to enter into a recession in the coming months, as if we haven’t been in one already according to the malleable definition of a recession. Assuming the inflation data supports it, the Fed should continue raising rates until it negatively impacts the jobs market and enough people start losing their jobs or can't find work. But as of right now there are 4 million open jobs that can't be filled, and more than enough able-bodied workers to fill them.
Still emerging from the pandemic, a strong jobs report and fourth-quarter 3.9% GDP last year gave the Fed a lot more leverage to continue raising rates, ending a year on a positive note that started with negative data.
Minneapolis Fed President Neel Kashkari said Wednesday, in a post for the district’s website, that he sees the funds rate rising to 5.4% and possibly higher if inflation doesn’t trend down.
In addition to battling inflation, the Fed has been attempting to reduce the size of its balance sheet, which has fallen $364 billion to $8.6 trillion since early June. Where we end up remains to be anyone’s guess as the Fed is truly navigating uncharted policy waters and market conditions.
While there’s no crystal ball, conventional wisdom says that mortgage rates track the overall policy of the Fed, and more closely, the 10-Year Treasury. If that’s true, then mortgage rates are going up in 2023. And while they might be higher than where they are now, home buyers need to be smart about their approach and lock in a low rate when they can.
Waiting can be costly, even if you’re waiting for home prices to drop.
If we experience hyper-inflation, we believe Chairman Powell is committed to fighting it, meaning we could easily see mortgage rates in the double digits in that scenario; another early 1980’s type event.
Regardless, high IQ buyers buy when rates are as low as they can get them, no matter where they are at the time they buy. Remember, you’re either going to be renting and paying the landlord’s equity, or owning, and building your own. So, budget well, plan ahead, and home buy accordingly.
30 Year Fixed Mortgage Rates
Source: Mortgage News Daily
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