Fed Raises Nominal Interest Rate by 0.25%

Is the tenth time the charm? Continuing the most aggressive series of rate hikes since the 1980s, at the end of the May 2-3 meeting of the Federal Reserve’s Federal Open Market Committee (FOMC) raised the nominal interest rate by 25 basis points to a range of 5.00% to 5.25% due to the easing—but not taming—of inflation which the FOMC is “strongly committed” to returning inflation to its 2% objective. 

This move was made days after the failure of yet another big bank, First Republic, whose assets were sold off to JPMorgan Chase, and became the second-largest bank failure ever, adding further turmoil to the markets. Still, economic activity expanded at a modest pace in the first quarter of 2023. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated above the 2% target rate the Fed wants to see. 

However, in a press conference after the announcement, Chairman Jerome Powell said that the FOMC has not committed itself to rate pause at this point at its June meeting. 

This marks the tenth consecutive hike and is now 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), March 2023 (+25 points), and now May 2023 (+25 points). This is equivalent to a rise of 5.00 percentage points over the last year.  

The next FOMC meeting occurs June 13-14, 2023. Currently, they meet eight times a year—emergency meetings notwithstanding. 

In a short, prepared statement released at the conclusion of the meeting, the FOMC said: 

“The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.” 

“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 5.00-5.25% percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, 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 percent 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.” 

Realtor.com Chief Economist, Danielle Hale commented on the news after the announcement: 

“The Federal Reserve’s FOMC, the rate-setting body that meets roughly 8 times per year, elected to raise the short-term policy rate by 25 basis points as still-strong economic data and slowly improving inflation suggest that higher rates are what’s needed to bring economic activity back to a pace consistent with target price growth of 2%.” 

“Higher rates should lead to cooler economic growth and lower hiring demand from businesses which will dampen some of the price pressures that have been pain points for businesses and consumers alike. As the economy downshifts, there's a risk that we could see too much slowing as earlier rate hikes are still transmitting through the economy and recent bank failures are compounding the ramifications of higher rates. This could tip the economy into recession. But to date, the unemployment rate remains near long-term lows and while job openings have shrunk considerably, they still far outpace available labor supply.” 

“Meanwhile, price growth, particularly for goods and services excluding food and energy costs, has retreated, but remains 2-3 times higher than the target pace. In other words, the balance of risks still seems to warrant a strong focus on inflation, but the scales are shifting. In this month’s statement, the Fed removed previous guidance that stated, ‘The Committee anticipates that some additional policy firming may be appropriate.’ This does not close the door on further rate hikes, but likely raises the threshold of economic and inflationary momentum that would be needed to garner supporting votes for additional hikes.” 

“This Fed meeting did not include updated economic projections and the majority of data that the Fed relied on to inform today’s decision has been available for several weeks. This is a contrast to the June meeting which falls later in the month, so the Fed will have two additional monthly readings on both the labor market and consumer inflation to consider. If economic indicators are lukewarm, this should lead to a more sustained, gradual decline in mortgage rates as the Fed is less likely to find it appropriate to continue rate hikes.” 

“However, above-expected hiring, price growth or other economic activity, could lead to upticks in the mortgage rate in anticipation that tighter Fed policy will be needed. Conversely, weaker than expected job data or price growth could lead to a faster decline in longer-term rates including mortgage rates, although these declines may not necessarily be sustained if subsequent data improves.” 

“As a result, the rest of May could be a rocky ride for interest rates, including mortgage rates. Today’s Fed move was well anticipated, and should not cause a major shift in mortgage and other interest rates. The Fed continues to remain vigilant, watching for signs that financial sector stresses have impacted the real economy. Most likely, this factor will remain a wild card for the next few meetings as data continue to roll in.” 

“After climbing from just over 3% to just over 7% in 2022, mortgage rates have occupied a narrower range in 2023, hitting a low just above 6% and nearing but not surpassing 7%. This year's ups and downs are driven by shifting perspectives on just how close we are to the end of the Fed's tightening cycle and how smooth or rough the economic landing will be. With a good number of major economic indicators still to come, potential homebuyers, sellers, and lenders will all need to remain on their toes even after the Fed's decision. The most likely trajectory for mortgage rates is slightly higher in advance of the Fed meeting and slightly lower after the Fed meeting, however data surprises could reshape these trends." 

Bright MLS Chief Economist Dr. Lisa Sturtevant had the following comments on today’s Federal Reserve announcement: 

“The Federal Reserve has been telegraphing from the start of its rate hikes that fighting inflation was the No. 1 priority and that bringing inflation down would not be a painless process. So, despite the recent instability in the banking sector, including this week’s collapse of First Republic Bank, the Fed raised rates by a quarter of a percentage point today, bringing the federal funds rate to a target range of between 5% and 5.25%. Investors had been anticipating this hike, and the Fed does not want to do anything to create more uncertainty in the markets.” 

“But with the shakiness in the banking sector and signs of a weakening labor market, the Federal Reserve signaled it wants to maintain flexibility in whether to pause or continue interest rate increases next month. Even if the Fed does ultimately decide to pullback next month, it is far from clear that we have seen the end of interest rate increases this year. Turbulence in the banking industry has grabbed the headlines in recent weeks, but inflation still remains persistently high.” 

“The housing market impact will be tied more to the overall trajectory of economic uncertainty than to this week’s increase to the Federal funds rate. Mortgage rates have settled into a new normal of around 6.5 % on a 30-year fixed-rate loan. With growing recession risks, we could see mortgage rates dip lower, but we will not be returning to the 3% level seen during the height of the pandemic.” 

“Despite higher borrowing costs, buyers are still active in the market. Low inventory has kept prices stable, and even rising, in most markets. Repeat buyers, those who are selling a home before buying another, have record-high equity to roll into their home purchase, which, in many cases, has served to offset the impact of higher rates.” 

“Buying and selling a home is often the biggest financial decision an individual or family makes. But it is also an emotional one.  At this point in the market, the most important factor to watch may not be rates but rather how consumers are feeling. Consumer confidence fell to a nine-month low last month. News about instability in the banking sector has made people more pessimistic about the economy, even if their own personal finances have not been affected. If that unease persists, we could see a tepid housing market in the second half of the year.” 

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.