Fed Slows Rate Hike Pace, OK’s 0.25% Bump
Rate hike is 8th since March 2022.
The Federal Reserve on Wednesday eased the pace of its monetary tightening following signs that inflation is slowing, while declaring that its work is not done.
Following the conclusion of the Federal Open Market Committee’s (FOMC) first two-day meeting of 2023, Chairman Jerome Powell announced the committee approved a 25-basis-point increase in the federal funds rate — the smallest increase since the Fed began raising rates last March.
The FOMC unanimously approved raising the target range for the federal funds rate to between 4.25% and 4.75%, issuing a statement that noted the committee “anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.”
The FOMC said it would determine future increases based on “the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
The committee also said it would make no changes to previously announced plans for reducing its holding of Treasury securities and agency debt and agency mortgage-backed securities.
“The committee is strongly committed to returning inflation to its 2% objective,” the FOMC statement said.
The 0.25% rate hike announced Wednesday was the eighth time the Fed has increased the federal funds rate since it began tightening monetary policy in March 2022 to rein in inflation. It follows a 0.5% increase announced in December, which came after four consecutive increases of 0.75%.
'Not Fully Done'
During a news conference after the meeting Powell said that while certain sectors of the economy have shown signs that inflation is easing, other sectors have not.
“The job is not fully done. We have a sector [the core services minus housing sector] that represents 56% of the core inflation index where we don’t see this disinflation yet,” he said.
“It would be very premature to declare victory or to say we’ve got this. Until we do [see signs of disinflation in that sector], we see ourselves as having a lot of work left to do.”
Powell did note that the committee “can now say, I think, for the first time that the disinflationary process has started. This is a good thing.”
“Over past 3 months, there has been a welcome reduction in increases,” he continued. “But we will need substantially more evidence to be confident that inflation is on a downward path.”
It didn’t quite get that additional evidence on Wednesday. The Labor Department released its monthly Job Openings and Labor Turnover Survey (JOLTS) report, which showed the number of job openings rose unexpectedly at the end of 2022. According to the report, there were nearly 2 jobs for every unemployed person in the U.S. in December.
Because of the continuing strength of the labor market and the missing signs of disinflation in a key market sector, Powell said, the committee remains cautious about halting its monetary tightening efforts too soon.
“I continue to think that it’s very difficult to manage the risk of doing too little,” he said.
A Floor Under Mortgage Rates
George Ratiu, manager of economic research for Realtor.com, said the fed has accomplished quite a bit with its efforts.
“The central bank has been engaged in an aggressive monetary tightening over the past year aiming to subdue inflation which ran at 40-year highs for the better part of 2022,” Ratiu said. “The rate hikes, combined with the reduction in the bank’s balance sheet, have resulted in a noticeable increase in borrowing costs and a slowdown in consumer demand, especially in real estate markets. The main price measures — the Consumer Price Index and the Personal Consumption Expenditures index — have notched visible slowdowns over the past five months. In addition, recent wage data also highlight moderation in the growth trajectory, further taking steam out of the inflationary engine.”
Ratiu said economic growth remains on a “cautiously optimistic” path.
“The initial estimate of fourth quarter 2022 gross domestic product came in at an annual rate of 2.9%, a solid reading,” he said. “January 2023 initial jobless claims dropped below 200,000, while the unemployment rate slid to 3.5%, the same low level seen in pre-pandemic January 2020. Even with tech and real estate sector layoffs capturing headlines, the labor market remains on solid footing, with more open jobs than available unemployed workers. At the same time, companies are reporting record earnings. By a host of measures, the start of this year signals the possibility that the Fed may succeed in achieving the soft landing it has been aiming for.”
Still, Ratiu noted, the latest rate hike will increase the cost of borrowing for consumers. “With the Fed’s fund rate serving as a basis for the prime rate, Americans will see higher interest rates for credit cards, automobile and personal loans, as well as adjustable-rate mortgages,” he said.
For real estate markets, he added, the increase “will keep a floor under mortgage rates for the next couple of months. The Fed’s short-term rate does not directly impact long-term mortgage rates, however, rising borrowing costs trickle throughout the financial system. The 30-year fixed mortgage rate has moved in the 6% to 7% range since mid-November 2022. While it has been on a downward glide, it remains about 260 basis points above last year.”
Ratiu, however, did offer some hope for home buyers, given that there is a growing number of homes for sale and prices are retreating.
“There is hope that this year will offer more opportunities,” he said. “Median list prices have dropped 11% from their June 2022 peaks. For the buyer of a median-priced home, these lower prices translate into a $9,800 savings on a 20% down payment. This is a welcome shift for households still feeling the squeeze of higher prices and elevated borrowing costs.”
Powell said the committee continues to believe “ongoing increases” in the federal funds rate are appropriate, with the target peak range for this year set at between 5% and 5.25%.
He also noted that the committee will receive two more labor market reports and two more GDP reports before its next meeting, which is scheduled for March 21-22.
A lot can happen in that time, but the committee remains committed to getting inflation down to its 2% goal, Powell said.
“Restoring price stability will require a restrictive stance for some time,” he said.