As expected, the Fed raises rates for the 8th time since March
The latest rate hike of a quarter point is the smallest increase since rates began their steady climb last spring.
- Federal Reserve Chair Jerome Powell said that "ongoing hikes" are likely until inflation moves down to 2%.
- “For real estate markets, today’s decision by the Fed will keep a floor under mortgage rates for the next couple of months,” said economist George Ratiu.
Declaring the Fed has "more work to do," Chair Jerome Powell lifted interest rates by a quarter percentage point Wednesday and predicted "ongoing hikes will be necessary" until inflation is under control.
"The historical record cautions against prematurely loosening policy," Powell said at a Wednesday afternoon press conference. "Everything we do is in service to our public mission."
The Fed's rate hike of a quarter percentage point is smaller than its more aggressive increases in 2022. The Fed last raised rates by 50 basis points in December after four consecutive three-quarter-point increases. It also is the eighth increase since the Fed began raising rates last spring. Interest rates for mortgages tend to follow changes by the Fed, which does not directly control the cost for home loans.
The Federal Open Market Committee, which is meeting this week, released its policy statement Wednesday afternoon, and Powell discussed the Fed's strategy in a press conference. The committee's stated goal is to bring inflation down to roughly 2%. Inflation currently hovers at more than 6%.
"We are now in disinflation but it has to spread throughout the economy," Powell told reporters.
Powell noted that consumer spending is expanding at a subdued pace and the activity in the housing sector continues to weaken. "The full effects of monetary tightening have yet to be felt," Powell said, adding that "we have no desire to overtighten," but "in this situation with the highest inflation in four years, the job is not fully done."
Powell's comments aligned with the views and forecasts of economists, who said that the more modest rate increase is a strong indicator that the Fed sees economic conditions improving.
"Economic growth remains on a cautiously optimistic path," said George Ratiu, senior economist at Realtor.com. "For real estate markets, today's decision by the Fed will keep a floor under mortgage rates for the next couple of months."
Ratiu noted that the Fed committee affirmed that it will weigh incoming economic data, as well as "the lag effects" of its policy decisions, when determining the next steps.
Lawrence Yun, NAR chief economist, also acknowledged the Fed's "willingness to adjust policy based on data." In commenting on the latest increase, Yun said, "Softer inflation of late led to a softer rate increase today. As inflation calms further from rising apartment vacancies in upcoming months, the Fed will adjust to a no-rate increase by the middle of the year and even a rate cut by December. That is good news for mortgage rates, which will possibly fall to 5.5% by the year end."
Bright MLS chief economist Lisa Sturtevant echoed Yun's optimism: "As the Federal Reserve eases rate hikes, the costs for home loans should stabilize or come down further — and "should spur a strong spring housing market."
"This move marks a shift from the aggressive approach of 2022 to a more cautious strategy as we head into 2023," Sturtevant said. "The more modest rate increase is in response to easing inflation, but it also gives the Fed time to wait for more clarity in the economic data."
Amplifying Powell's remarks, Sturtevant described the economic picture as a "bit of a hodgepodge. The overall economy posted strong growth in the fourth quarter, but looking under the hood reveals some weaknesses, particularly in consumer spending," Sturtevant said.
In the real estate sector, she sees tight housing inventory as a major constraint. "More new housing construction is necessary not only to bring balance to the housing market, but also to contribute to economic growth," Sturtevant said.