The Federal Reserve announced, following its Jan. 31 – Feb. 1 Federal Open Market Committee (FOMC) meeting, an increase to the federal funds rate by 25 basis points. This increase brought rates to between 4.50 and 4.75 percent.
Federal Reserve Chair Jerome Powell indicated that, though the rate increases throughout 2022 have begun to show signs of lowering inflation, the rate is still above the Fed’s long-term goal.
“Inflation remains well above our longer-run goal of 2 percent,” Powell told reporters at the press conference following the conclusion of the FOMC meeting. “Over the 12 months ending in December, total PCE prices rose 5 percent, excluding the volatile food and energy category, core PCE prices rose 4.4 percent. The inflation data received over the past three months show a welcome reduction in the monthly pace of increases. While recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path. Despite elevated inflation, the longer-term inflation expectations appear to be well anchored, as reflected in a broad range of surveys on households, businesses and forecaster, as well as measures in financial markets.”
Powell described data from late-2022 and early-2023 as indicative of the early stages of disinflation.
“I would say it is a good thing the disinflation we have seen so far has not come at the expense of a weaker labor market, but I would also say the inflationary process you see under way is really at an early stage,” Powell said. “What you see is really in the good sector, you see inflation now coming down because supply chains have been fixed, demand is shifting back to services and shortages have been abandoned, so you see that in the other -- in the housing services sector, we expect inflation to continue moving up.”
Moving forward, Powell indicated the FOMC is prepared to continue making small increases, liking reaching 5 percent at the March meeting, with rate increases continuing later into the year.
Powell also indicated that he was confident Congress would reach an agreement regarding the debt ceiling before the mid-summer deadline, but the Fed was prepared to continue its efforts to lower inflation regardless of congressional action or inaction on the debt limit.
“While the FOMC statement noted that inflation has ‘eased somewhat,’ the unanimous vote of monetary policymakers to raise rates another 25 basis points – and signal that further increases are likely – indicates that markets should anticipate that the Federal Reserve will keep short-term rates higher for longer,” said Mortgage Bankers Association Senior Vice President and Chief Economist Mike Fratantoni. “This means rates will probably peak at about 5 percent in March, in the Fed’s efforts to force inflation down through a marked slowdown of the economy.
“While there are signs of slowing wage growth and other hints of a weakening job market, we expect that a slowdown in economic activity will ultimately result in the unemployment rate increasing significantly over the course of 2023.
“The Federal Reserve controls short-term rates, but long-term rates, including 30-year mortgage rates, are a function of market expectations for the path of the economy. And investors are betting that the economic slowdown and the Fed’s eventual victory over inflation will result in lower rates over time. MBA is still forecasting a modest drop in mortgage rates through 2023, ending closer to 5 percent rather than the 6 percent we have today.”