FOMC Announces a 0.250% Fed Funds Rate Increase

March 22, 2023
The Federal Open Market Committee (FOMC) announced an increase to the Fed funds rate at their March 2023 meeting.

In the just-released FOMC statement, the Fed announced a 0.25% hike in the Fed Funds rate (+25bps). This was in line with the market’s consensus expectation as measured in Fed Funds futures trading.

After the previous the 25bps hike on February 1, which followed a 50bps hike December 14, this increase marks an uncomfortable middle ground decision-wise. Today’s rate hike puts the Fed funds range at 4.75% to 5.00%.

This rate increase came on the heels of inflation and economic data that was projecting the possibility of the need for a larger 50bps hike on the way to an even higher expected terminal rate. That comes against the concern for the health of the banking system the collapses of Silicon Valley Bank and Signature Bank created. Not to mention First Republic Bank troubles and the takeover of Credit Suisse Bank overseas. A market participant and observer I follow closely described the predicament the Fed finds itself in as an “impossible situation.” That of course makes their actions all the more telling.

To wit, between the pressing concerns of inflation and banking system soundness, what was the more compelling concern at this point? With the Fed following in the European Central Bank’s footsteps with a rate hike, they simultaneously signaled the decision to press forward the inflation fight, and the belief actions to steady the banking industry to date have been sufficient and do not require the relief the opposite monetary policy move would bring.

What’s Next?

Also just released were the revised Summary of Economic Projections of each policy maker, the so-called dot plots. Current market expectations for the consensus dot plots were to show the terminal rate in this cycle going to 5.4%, implying two more 25bps hikes coming.

Look for Powell to suggest the possibility of a pause in rate hikes at today’s press conference. That will indicate a concern that trouble in the banking sector may continue and spread. Additionally, listen for comments he may make about holding the terminal rate for a longer period of time. The degree of importance given these comments will indicate which level of concern is greater and that will set the stage for whether bond markets may react to bring rates down, or to move them up.

It will not pay to look past the banking, inflation, and employment news between now and the May 3 FOMC meeting. There’s simply too much uncertainty with these opposing forces on rates. Too much possibility that news will cause rates to fall or to jump before then.

What Do Borrowers Do Now?

Originators should explain to borrowers who want to finance the purchase of a home that the current mortgage rate market remains exposed to a greater-than-typical level of uncertainty. Mortgage rates have benefitted recently from turmoil in the banking sector, but inflation is still a concern, and more so recently.

On top of that, the real estate market is retreating from the highest levels of unaffordability seen over the summer, but available inventory is still tight and will remain so for years to come. There is no market crash expected like we saw during the 2008 financial crisis on the horizon.

Rates falling further may still be on the horizon, but will be beyond today’s timing opportunity to find a suitable home for customers searching in a marketplace with historically low inventory.

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