The Federal Reserve Federal Open Market Committee (FOMC) voted to increase the federal fund rate by an additional 25 basis points during its May 2-3 meeting. Fed Chair Jerome Powell and the committee indicated this increase is possibly the last in a series of rate hikes started in March 2022 to address record-high inflation.
This latest increase takes the federal funds rate to a target range of 5 to 5.25 percent, its highest level since 2007. While the initial statement from the FOMC suggested a pause, Powell clarified during the press conference that followed that the committee was prepared to enact additional rate increases should they deem it necessary and that cuts were unlikely to happen this year.
“It’s possible that this time really is different,” Powell said. “We’ve raised rates by five percentage points in 14 months and the unemployment rate is 3.5 percent, even lower than where it was when we started.”
Banks and non-bank lenders are likely breathing a sigh of relief at the news the Fed has likely reached its rate peak, said Mortgage Bankers Association Senior Vice President and Chief Economist Mike Fratantoni.
“Neither a fragile banking sector nor a slowing job market prevented the Federal Reserve from increasing its short-term rate target again today, in line with market expectations,” Fratantoni said. “However, with this increase, we expect this is the peak rate for this cycle, and potential homebuyers and their mortgage lenders may be breathing a sigh of relief. We continue to expect that mortgage rates will drift down over the course of the year as the economy slows, as we move closer to the Fed lowering rates beginning in 2024, and as financial market volatility finally begins to settle down.”
The housing market is likely to see more benefit than challenges relating to interest rates and credit conditions, Fratantoni added.
“In the near term, tighter credit conditions will slow the pace of economic activity,” Fratantoni said. “The housing sector is already operating under tight credit, so we don’t expect this headwind to outweigh the benefits from somewhat lower mortgage rates. The housing market is likely pulling the economy out of this slowdown, as it typically does. While lower mortgage rates will help with affordability, they won’t solve for the lack of inventory on the market, particularly of existing homes. This lack of supply will continue to be the primary constraint on home sales through 2023.”
Rep. Maxine Waters (D-Calif.) expressed her dissatisfactions with the Fed’s decision to increase the federal fund rate following this FOMC meeting. She cited the impending national debt limit default – which the Treasury Department indicated could be less than a month from now – and the recent bank defaults as reasons the Fed should have held off from increasing rates this month.
“Less than a month from a catastrophic default on our nation’s debt due to Republicans’ reckless games and two days after the third major bank failure of the year, the Federal Reserve has again decided to raise interest rates,” Waters said. “While I acknowledge the FOMC signaled they may finally pause their aggressive rate hikes, it is well past time that they do so.
“It would be prudent for the Fed to allow for some time to pass to better assess the full impact of their rate hikes in the midst of a rapidly evolving economic landscape,” Waters added. “I am especially concerned about the further harm this additional hike will pose to the housing market, and our nation’s workers and small businesses. Not to mention, while the Fed has a dual mandate to promote stability and economic employment, these hikes may very well have the exact opposite effect and instead push our country into a recession.”