Fed Expected To Raise Rate By Half Percentage Point
Federal Reserve chairman Jerome Powell hinted at the likely increase in an April appearance.
Amidst concerns of a recession sparked by last week's first quarter GDP report that the economy shrunk by 1.4%, the Federal Open Market Committee is expected to recommend a half percentage point increase in the federal funds rate when it meets today and Wednesday.
If that happens it would be the first time since 2000 that the Fed raised rates by that much and the first time in 16 years that it raised them in back-to-back meetings.
In March the committee voted to raise rates by a quarter percentage point. After that meeting, 30-year fixed mortgage rates went on a tear, information from Freddie Mac shows, jumping from 3.76% to 5.10% -- in eight weeks.
Mortgage rates could jump higher regardless of the Fed vote. The yield on the 10-year Treasury bond went over 3% yesterday.
The expected hike is the Fed's response to continued increases in the inflation rate. The cost of food, energy and housing rose to a 40-year high of 8.5% from a year ago in March, four times higher than the Fed’s goal of 2% rate of inflation.
Supply chain shortages, the war in Ukraine and a COVID-19 outbreak have also contributed to price increases.
Federal Reserve chairman Jerome Powell hinted at the likely increase in an April appearance, saying that “50 basis points will be on the table for the May meeting.”
Fred Carstensen, a University of Connecticut professor of finance and economics, said that the Fed will raise the rate because “it’s the only tool available to them.”
Carstensen said that he expects mortgage lenders to raise interest rates in response, which will depress home purchases to a degree and that he envisions mortgage rates going as high as 6 to 8%.
“But even at that level it’s not particularly historic,” Carstensen said.
Some analysts have speculated that the committee could also raise the federal funds rate by another .75 percentage point at its June meeting and continue the trend, with lower increases, over the subsequent five meetings left in the year.
Carstensen was not alarmed by the idea of an even larger increase in the rate in June.
“Even over the next several months, if they raise it by two percentage points, we started at zero for God’s sake,” Carstensen said, noting that historically the rate has been between 3% and 4%.
“We’re still in a fairly accommodating environment,” he said.
The committee has also signaled that it could begin shrinking its $9 trillion portfolio at a pace of as much as $95 billion a month, according to minutes of the March meeting. Analysts say that move could lead to even higher mortgage and long-term borrowing rates.
Carstensen said he expects that in the next year, as supply chain issues, the COVID outbreak in China and -hopefully- the war in Ukraine are resolved, the rate of inflation will begin to recede.
“It’s been a long time since we’ve dealt with an inflationary period,” he said.