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Continuing the most aggressive series of rate hikes since the 1980s, at the end of the March meeting of the Federal Reserve’s Federal Open Market Committee (FOMC) raised the nominal interest rate by 25 basis points to a range of 4.75% to 5.00% due to the easing—but not taming—of inflation which the FOMC is “strongly committed” to returning inflation to its 2% objective.
Notably absent from the discussion after the meeting was that inflation is cooling—the elimination of this topic signals that inflation has not meaningfully fallen to the desired level of 2% and that further rate hikes will be all but inevitable.
This marks the ninth consecutive hike and the biggest string of consecutive rate hikes on record. Since the rate hikes began, the FOMC raised rates in March 2022 (+25 points), May 2022 (+50 points), June 2022 (+75 points), August 2022 (+75 points), September (+75 points), November 2022 (+75 points), December 2022 (+50 points), February 2023 (+50 points), and now March 2023 (+25 points). This is equivalent to a rise of 4.75 percentage points over the last year.
The next FOMC meeting occurs May 3, 2023. Currently, they meet eight times a year—emergency meetings not withstanding.
In a short, prepared statement released at the conclusion of the meeting, the FOMC said:
“Recent indicators point to modest growth in spending and production. Job gains have picked up in recent months and are running at a robust pace; the unemployment rate has remained low. Inflation remains elevated.”
“The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.”
“The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4.75% to 5.00%. The Committee will closely monitor incoming information and assess the implications for monetary policy. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2% objective.”
“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 Mortgage Bankers Association (MBA) SVP and Chief Economist Mike Fratantoni also commented after the meeting:
“Even with the heightened financial market volatility stemming from recent bank failures, the FOMC decided at its March meeting to increase the federal funds target another 25 basis points. However, this was a ‘dovish hike,’ as the commentary and economic projections suggest we may be at or near the peak fed funds rate for this cycle.”
“Inflation is still quite high, but it is slowing. And while the job market is still quite strong, it is weakening, as evidenced by slowing wage growth. Coupled with the advent of much tighter financial conditions after the events of the past couple of weeks, we are anticipating a much slower economy over the next few quarters—which should further bring down inflation per the Fed’s goal.
“Homebuyers in 2023 have shown themselves to be quite sensitive to any changes in mortgage rates. With this move from the Federal Reserve, MBA is holding to its forecast that mortgage rates are likely to trend down over the course of this year, which should provide support for the purchase market. The housing market was the first sector to slow as the result of tighter monetary policy and should be the first to benefit as policymakers slow—and ultimately stop—hiking rates.
“The statement indicated an intent to continue quantitative tightening, allowing Treasury and Agency MBS to passively roll off the Fed’s balance sheet. We expect that the recent increase in direct lending by the Fed through the discount window and the new term lending facility will help to improve liquidity for banks, despite this ongoing reduction in the size of the Fed’s securities holdings.”
In addition, First American Chief Economist Odeta Kushi made the following comments:
“The Fed's inflation fight continues. While recent inflation data prompted many to think the Federal Reserve would inch the terminal rate higher, the recent stress on the banking sector may be the reason for the unchanged terminal rate projection of 5.1%.
“Real estate is a very interest rate-sensitive sector, which is why when the Fed first hit the proverbial brakes on the economy by hiking interest rates, the housing sector was the first to go through the windshield like a crash test dummy. As long as the Fed’s fight against inflation persists, it will continue to put downward pressure on the housing market because mortgage rates typically follow the same path as long-term bond yields, which move with inflation expectations and the Fed’s actions.”
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.
