As predicted, the Federal Open Market Committee Wednesday raised interest rates by a quarter percent to .25 to .50%. The increase was the first since 2018.
In a release following the meeting, the FOMC noted that while economic activity and employment continue to strengthen, inflation remains elevated due to supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures. Inflation is at 7.9% — the highest since 1982.
The committee also pointed to the invasion of Ukraine by Russia as a likely factor in the creation of “additional upward pressure on inflation and weigh on economic activity.”
In his remarks following the committee’s meeting, Federal Reserve Chairman Jerome Powell reiterated that while the economy is strong, the time has come to restore price stability.
“We feel the economy can handle tighter monetary policy,” Powell said.
The committee plans to continue to monitor inflation with the goal of getting it down to 2%. Powell said that the actions it takes in the remaining six meetings will reflect that, including the possibility of six more rate hikes in 2022.
“The committee anticipates further increases this year,” he said.
Financial leaders weighed in the the affect of the FOMC’s actions Wednesday.
Adam DeSanctis director of public affairs, and external relations for the Mortgage Bankers Association, said the committee clearly signaled that additional hikes are coming, with the median FOMC member expecting to raise rates at each of the remaining six meetings in 2022.
“With the unemployment rate below 4%, inflation nearing 8%, and the war in Ukraine likely to put even more upward pressure on prices, this is what the Fed needs to do to bring inflation under control,” DeSanctis said noting that the FOMC does not expect inflation to be back at 2% until after 2024.
Lending rates, including mortgages, are also expected to increase because banks and credit unions have to maintain their net interest margin, according to industry analysts.
“One of the biggest components of both the Consumer Price Index and PCE is housing. Due to how the housing components of inflation are measured, they tend to lag the observed rental and house price increases by approximately one year. It's just beginning to show up in official estimates and will keep overall inflation elevated,” said First American Deputy Chief Economist Odeta Kush.
“We estimate that between now and 2024, rates will increase, but depending on economic and geopolitical events, we could have a slowdown and possibly a recession starting in 2024-2025. In such a case, all rates, including mortgages, will start going down again,” said Dan Geller, a behavioral economist for financial services at Analyticom.
Powell also confirmed that the committee is finalizing a plan to begin reducing its $9 trillion asset portfolio, with action occurring as early as May, when members meet again. He did not offer specifics, but said that people would recognize the actions from previous balance sheet reductions.
Powell acknowledged that the ongoing war in Ukraine and the possibility of related energy and supply line issues could throw the committee’s plans into flux, but added that it will deal with whatever arises, “for better or worse.”
“We don’t have a perfect crystal ball about the future, but we’re prepared to use our tools to restore price stability,” he said.
