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Rates Brace for Impact: Federal Reserve approves interest rate hike of half a percentage point

The Federal Reserve Wednesday approved a 50 basis point increase to its policy interest rate in an effort to reduce inflation, in conjunction with a plan to shrink its $9 trillion asset portfolio beginning next month, according to Chairman Jerome Powell.

During a news conference following the Fed’s committee meeting, Powell announced the increase and outlined the Fed’s plan to begin “the process of significantly reducing the size of our balance sheet,” he said.

“It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all,” Powell said. “The current picture is plain to see: The labor market is extremely tight and inflation is much too high. Against this backdrop, today the FOMC raised its policy interest rate by a half percentage point and anticipates that ongoing increases in the target rate for the federal funds rate will be appropriate.”

Powell began his address by saying he wished to speak directly to the American public.

“Inflation is much too high. We understand the hardship it is causing and we are moving expeditiously to bring it back down,” Powell said during the news conference. “We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses.”

“Our overarching focus is using our tools to bring inflation back down to our 2% goal. With regard to our balance sheet, we also issued our specific plans for reducing our securities holdings. Consistent with the principles we issued in January, we intend to significantly reduce the size of our balance sheet over time in a predictable manner,” Powell said. “We’ll be prepared to adjust any of the details of our approach in light of economic and financial developments.”

Powell said “after expanding at a robust 5.5% pace last year, overall economic activity edged down in the first quarter.” But he said the labor market has continued to strengthen, despite inflation remaining “well above our longer run goal of 2%.”

“In March the unemployment rate hit a post-pandemic and near-five-decade low of 3.6%,” Powell said, touting improvements in the labor market.

After discussing how Russia’s invasion of Ukraine is affecting global conditions, Powell said: “Our job is to consider the implications for the U.S. economy — which remain highly uncertain.” The ongoing invasion is expected to restrain economic activity abroad and will continue to have an affect on the global supply chain, he said.

“Our policy has been adapting and it will continue to do so,” Powell said, noting that at the committee meeting members, “raised the target range for the federal funds rate by a half percentage point and stated that it anticipates that ongoing increases in the target range will be appropriate.”

Additional 50 bps increases “should be on the table at the next couple of meetings,” he said.

Powell also explained “the economy often evolves in unexpected ways,” and noted that inflation has “obviously surprised” some during the past year. Powell then warned, “further surprises could be in store.”

“We therefore will need to be nimble … and we will strive to avoid adding uncertainty to what is already an an extraordinarily challenging and uncertain time,” he said.

“The Fed’s monetary policy actions are guided by our mandate to promote maximum employment and stable prices for the American people,” Powell said. “We understand that our actions affect communities, families and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum employment and price stability goals.”

HousingWire Lead Analyst Logan Mohtashami outlined what the interest rate hike might mean for mortgage rates. “The Fed raised rates and talked about bringing inflation down, and after the press meeting, bond yields fell. Why? I believe that many Fed rate hikes have been priced, taking the 10-year yield toward 3.0%. If bond yields keep rising; we have more room to get toward 6.0% on mortgage rates. However, if economic data fades and yields are coming down, mortgage rates will go down with it.

“Right now, we are in a tug of war between two camps. One group believes that the Fed can’t raise rates that much because it will cause a recession, and another group believes the Fed needs to create a recession to fight inflation,” Mohtashami said.

“Since Europe’s economy is slowing down, China’s economy is in a mess, Japan needs more tourism still, and Russia is in a recession, there are limits to how much more global bond yields can head higher and our yields and mortgage rates. We will have to take the economic data one week at a time because we do see some cracks in the inflation data and growth.

“However, the Russian invasion of Ukraine and China’s lockdown have put pressure on inflation data. It’s going to be an epic tug of war for the rest of the year. For now, the 10-year yield has held around the 3.0% level without a breakout. The peak yield on the 10-year yield was 3.25% in 2018 when mortgage rates got to 5.0% back then. Rates are obviously higher today as the mortgage rate pricing is worse.”


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