FOMC Announces a 0.250% Fed Funds Rate Increase

May 03, 2023
The Federal Open Market Committee announced an increase to the federal funds rate at its May 2023 meeting.

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

Key to understanding today’s policy statement and the press conference that follows will be language that signals the Fed Funds rate has reached the anticipated “terminal rate” of this rate hike cycle. Watch for the word “pause” in the statement and in Chair Powell’s statement and Q&A answers. Today’s rate hike puts the Fed funds range at 5.00% to 5.25%.

Powell is in a precarious situation giving forward guidance today. In addition to the now slowing — but still elevated — pace of inflation, a slowing but still elevated jobs market and moderating economic activity that are the desired effects of the rate hike campaign, the Fed also has to weigh the impact of the fallout from the banking crisis. How much of an additional damper on the economy will a contraction in credit, stemming from banking reaction to the recent bank failures, do to slow the economy more on top of the now 16-year high level of Fed Funds?

What’s Next?

As Powell signals a pause, the bond markets will interpret whether that means the Fed is pivoting towards rate cuts (currently priced into Fed Funds futures before year end) or if the Fed will hold this terminal rate longer than current pricing indicates. The more extreme possibility is if the market has any concern an additional hike could come after the pause starts, if conditions warrant that. That possibility will require fresh data and calm waters in the banking sector.

At the end of the day, that leaves us with a lot of uncertainty to deal with. While we may have reached a plateau today, the immediate path forward is still not clear and markets are focused on forward guidance to determine how to adjust positions, which of course will influence the level of rates.

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 greater-than-typical levels of uncertainty. Mortgage rates have benefitted recently from turmoil in the banking sector, but inflation is still far from cooling down to the Fed’s 2% target.

On top of that, 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 after finding a suitable home for purchase, the best course of action is to secure financing quickly to avoid the worst of possible market volatility that could upend those plans.

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