A headshot of Fed Chair Jerome Powell
Illustration by Lanette Behiry/Real Estate News; Shutterstock

Fed moves forward with modest rate hike 

The Federal Reserve increased its benchmark rate by a quarter point, which is likely to influence mortgage rates and slow homebuying activity this spring.

March 22, 2023
3 minutes

Key points:

  • With this latest quarter-point hike, the federal funds rate is now at its highest level since 2007.
  • While mindful of recent turmoil in the banking industry, the Fed wants to continue fighting higher inflation.
  • The decision could cause mortgage rates to rise toward 7% again heading into the spring homebuying season

In the wake of recent turmoil in the banking sector, the Federal Reserve announced a modest increase to its benchmark interest rate on March 22, ticking it up another quarter percentage point to a range of 4.75 to 5%.

The announcement was made following the Federal Open Market Committee meeting. The committee voted unanimously for the increase, according to a news release. 

The federal funds rate is now at its highest level since 2007.

The quarter-point hike was expected by many in the financial industry, though some analysts had speculated that the Fed could defer a rate increase to avoid any potential fallout in the banking industry.

The decision involved a bit of a balancing act for the Federal Reserve, which is trying to tame inflation but is mindful of the vulnerabilities in the current economy, particularly after bank failures like the collapse of Silicon Valley Bank in recent weeks.

"Today's decision suggests the Fed believes the worst of the banking crisis is behind us," said Bright MLS Chief Economist Lisa Sturtevant. "The rate hike today also indicates that the Federal Reserve continues to view fighting inflation as its primary objective."

The quarter-point increase shows that the Fed is still determined to bring down inflation but is aware that a more aggressive increase would potentially be a destabilizing influence on the financial sector, said Paul Bishop, vice president of research and T3 Sixty economist. (Note: Real Estate News and T3 Sixty share a founder, Stefan Swanepoel.)

"Many banks will likely curtail lending for a while which will slow business activity and also help the Fed toward its goal of slowing inflation," Bishop said.

While 30-year fixed-rate mortgages aren't directly tied to the Federal Reserve's benchmark rate, Fed actions tend to influence mortgage rates and can provide some insight into where things are going next. 

The Fed has steadily raised its benchmark rate in the past year — today's increase is the ninth since March 2022 — but mortgage rates have been a bit more up-and-down, rising to more than 7% last fall before dropping to around 6% in February. Last week, Freddie Mac's survey had 30-year fixed rates at 6.6%.

With this latest federal funds rate hike, "homebuyers should be prepared for higher mortgage rates, perhaps climbing back to the 7% level we saw late last year," said Bishop.

Sturtevant agreed, saying it's likely that the spring homebuying season will be more subdued. 

In comments following the meeting, the FOMC noted that recent economic indicators point to modest growth in spending and production while job growth remains robust.

"Inflation remains too high," said Jerome Powell, chairman of the U.S. Federal Reserve, noting that is well above the Federal Reserve's goal of 2%. With inflation currently around 6%, Powell said to expect some bumpiness in the economy in the coming year as the Fed continues to try and tamp it down. 

The committee also said the U.S. banking system is sound, although the bank failures in recent weeks will "likely result in tighter credit conditions for households and businesses."

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