The Federal Reserve’s Federal Open Market Committee voted to raise interest rates by 0.5 percentage points following the committee’s May 3-4 meeting.
Leading up to the second rate increase of the year, there have been growing concerns from JPMorgan CEO Jamie Dimon, Fannie Mae, and others that a too rapid increase may trigger a contraction of the economy and a “soft landing” or a brief recession. These worries were compounded last week when the GDP declined by 1.4 percent in the first quarter.
Dimon also has gone on record saying he believed the Fed should have started raising interest rates earlier in the pandemic in anticipation of higher inflation rates.
Fed Chair Jerome Powell said the central bank has a “good chance” to curb inflation without inducing a recession but noted that there may be challenges in completing that undertaking.
“We don’t have precision surgical tools. We have essentially interest rates, the balance sheet and forward guidance and they’re ... famously blunt tools,” Powell said at the press conference following the FOMC meeting.
“No one thinks this will be easy. No one thinks it’s straightforward. But there’s certainly a plausible path to this,” he added.
Some were concerned the FOMC meeting in May would result in a 0.75 percentage point rate increase. There was fear a larger rate hike would have a major cooling effect on the economy and trigger a recession.
In the press conference following the FOMC meeting, Powell confirmed that the FOMC had no intentions of utilizing rate hikes greater than 0.5 percentage points, but that there would likely be more of those throughout the remainder of the year to lower inflation, which is currently around 6.5 percent, to a more manageable 2 percent to 2.5 percent.
“Inflation is much too high and we understand the hardship it is causing and we are moving expeditiously to bring it back down,” Powell said. He added that there was “a broad sense on the committee that additional 50 basis-point increases should be on the table for the next couple of meetings.”
The increase in interest rates has already begun to affect the mortgage interest rates. According to bankrate.com, the national average for a 30-year fixed rate mortgage has reached 5.42 percent. It is expected to approach and possibly surpass 6 percent in the coming months.
“Mortgage rates resumed their climb this week as the 30-year fixed reached its highest point since 2009,” Freddie Mac Chief Economist Sam Khater said. “While losing affordability and inflationary pressures pose challenges for potential buyers, house price growth will continue but it is expected to decelerate in the coming months.”