Split image of  Federal Reserve logo and Jerome Powell with money background
Federal Reserve; Shutterstock

The Fed sticks to its plan, bumps rate by 25 points 

As many analysts had predicted, the Federal Reserve raised the benchmark interest rate for the 10th consecutive time since March.

May 3, 2023
2 minutes

Key points:

  • The Fed continues to act with the goal of getting inflation down to an annual rate of 2%.
  • Since the Fed had signaled their intentions, this latest hike shouldn’t have a big impact on mortgage interest rates.
  • Other economic data and events may be more likely to sway the direction of mortgage rates in the coming weeks.

The Federal Reserve stuck with its game plan of raising interest rates 25 basis points, but the impact on mortgage rates is still up in the air.

In its meeting on Wednesday, May 3, the Fed raised its benchmark rate to around 5.1%, marking the 10th consecutive hike since March 2022. The rate is at the highest level in nearly 16 years. The Fed also signaled that it was open to pausing future rate hikes for now, but did not commit to doing so.

Where mortgage interest rates will go from here is a bit uncertain, said Lisa Sturtevant, chief economist for Bright MLS. This rate hike was telegraphed well ahead of time, so today's announcement may not have immediate impacts on mortgage rates.

However, other economic and political factors could pull rates in different directions, Sturtevant said, particularly if instability in the banking sector continues.

"Turbulence in the banking industry has grabbed the headlines in recent weeks, but inflation still remains persistently high," Sturtevant said. "A weak jobs report later this week could further indicate slower economic growth and could push rates down."

Lawrence Yun, chief economist for the National Association of Realtors, was critical of the Fed's decision.

"The latest interest rate hike by the Federal Reserve is unnecessary and harmful," Yun said, noting that consumer price inflation will continue decelerating. "The fast rate hikes by the Fed have upended the balance sheets of many small regional banks. They are becoming zombie-like banks, unable to lend even to good businesses as they are more concerned with balance sheet shuffling for survival." 

Yun also warned against future hikes. "This situation will worsen with each additional rate hike by the Federal Reserve. Only by stopping the rate hikes or even a reversal later in the year after verifying much calmer inflation rates will the small banks have a better chance of survival against the big banks."

The latest Fed action is consistent with its strategy of continuing to raise rates with the goal of bringing inflation rate down to 2%, said Danielle Hale, Realtor.com's chief economist. While this hike was expected, plenty of other factors could affect mortgage interest rates this month.

"With a good number of major economic indicators still to come, potential homebuyers, sellers, and lenders will all need to remain on their toes even after the Fed's decision," Hale said.

Get the latest real estate news delivered to your inbox.