March FOMC Announcement: 0.250% Fed Funds Rate Hike

March 16, 2022
The Federal Reserve has announced the first Fed Funds Rate increase since 2018

In the just-released FOMC statement, the Fed announced a 0.25% hike in their Fed Funds rate. This is the first hike since 2018 and the first rate hike in what is expected to be a campaign of rate hikes. Today’s move was expected and, by and large, has already been priced into term bond markets.

The tone and additional guidance in the announcement will help the market understand what the Fed’s plans are for the campaign going forward. That guidance has a difficult course to navigate with the considerable level of inflation pressure and cross-currents of recent economic conditions, the war in Ukraine, and the risk of new COVID-19 variants.

The latest renditions of the dot plots were also released; these indicate each Governor’s projections of the economy and what they feel the path of the Fed Fund rate monetary policy tool should be. The market will decipher changes in the dot plots from the previous edition with what has transpired since that time. Then the markets will project forward where they see the Fed’s future policy moves going. One issue the market is particularly focused on is the number of additional rate hikes in 2022. Will it be as many as seven, or as few as five?

What’s Next?

The market is also looking for guidance on when the Fed will slow its reinvestment of bond portfolio proceeds to begin bringing down the absolute size of the portfolio. This will remove additional liquidity from the bond markets, resulting in a reversal of the “quantitative easing” (QE) that the bond purchases injected into the markets when the COVID-19 pandemic began in March 2020. In addition to questions about the pace of the rate hike campaign, expect questions for Chair Powell about this timing too.

This next step, referred to as “runoff” or “rolloff,” is about how fast the Fed will allow the portfolio to shrink. The Fed can precisely control this; as a result, the markets see these plans as another look into the Fed’s assessment of the economy and the cross-currents its exposed to. Powell’s press conference begins at 1:30 p.m. central time and should run about an hour.

What Do Borrowers Do Now?

I’ll keep beating this drum. All things considered, mortgage rates are still low. But, from one day to the next, the heightened level of volatility we’re experiencing makes waiting to rate lock a greater risk. It is prudent to rate lock a mortgage loan as soon as possible and avoid the chances of (even) higher rates in the intermediate term.

Borrowers who want to finance the purchase of a home should appreciate that the current mortgage rate market has more volatility because of the higher level of uncertainty in the bond markets  due to the Fed’s evolving monetary policy struggle to contain inflation.