What happened:
Today the Federal Reserve raised the federal funds rate by a quarter of a point in an ongoing effort to curb inflation. But further rate increases may not be necessary, as Fed chair Jerome Powell acknowledged that tighter credit conditions would weigh on households and businesses, and should further cool the US economy. Powell said the US banking system is sound and resilient, but stated that recent developments in the banking sector are, “likely to cause economic headwinds.”
The Fed has now raised the target range for the federal funds rate by a full 5 percentage points in the past year. At 5 to 5-¼ percent, the benchmark rate is now at its highest range since 2007. Powell said the Fed is ready to do more if additional hikes are needed, and will remain data dependent when weighing future policy decisions.
Senior Economist Orphe Divounguy’s thoughts on the impact to mortgage rates and housing:
Interest rate increases have cooled home sales volume and slowed home building in the past year. Chair Powell acknowledged the role that tighter monetary policy has played, referring to lower business fixed investment and reduced activity in the housing sector.
Powell’s indication that subsequent rate increases may not be necessary was a welcome signal for mortgage rates, but the path forward still remains uncertain. Inflation is still well above the Fed’s 2 percent target. While credit tightening coming from the recent banking sector turmoil is likely to cause some economic slowdown, core inflation is high and the labor market remains tight.
Longer term bond yields depend on current and expected inflation as well as the economic outlook. There are signs that an overheated economy is cooling down, and contributing factors to inflation are waning. US economic growth is slowing, the labor market is cooling and wage growth is moderating. The number of job openings fell to its lowest level in nearly two years.
The Fed has indicated that it is prepared to allow the US economy to grow below trend until there is clear and mounting evidence that inflation has cooled. Until then, the yield on the 10-year Treasury will remain high, along with the mortgage rates that tend to follow them.
Mortgage rates are steering both home supply and demand in today’s costly environment. Home sales picked up in January when rates were relatively low, then slacked off as they ramped back up.
Much uncertainty surrounds the state of the US economy. In his press conference, Powell alluded to the risk of the US defaulting on its debt, affirming that the Fed cannot be expected to protect the US economy and financial system from a failure of the US government to pay its bills. A default would create a large income shock for the economy and likely introduce significant volatility for mortgage rates.