Fed Resumes Rate Increases with a 25 BPS Hike

It has been 22 years since the nominal interest rate set by the Federal Reserve’s Open Market Committee has stood at 5.50%, but with today’s action of raising rates by 25 basis points after not taking action at their last meeting, they have made that a reality...and have left the possibility of another rate hike at the next meeting on the table as well. 

The most aggressive series of rate hikes in history ended in June when the committee held off on raising rates due to a litany of positive factors which consisted of 10 straight rate hikes over 15 months. Since the post-pandemic rate hikes began, the FOMC raised rates in March 2022 (+25 points), May 2022 (+50 points), June 2022 (+75 points), August 2022 (+75 points), September (+75 points), November 2022 (+75 points), December 2022 (+50 points), February 2023 (+50 points), March 2023 (+25 points), May 2023 (+25 points) and June ( +0 points). This is equivalent to a rise of 5.00 percentage points over the last year. 

The target rate now stands at 5.25-5.50%. The committees does not meet in August and next convenes on September 19-20. 

In a prepared statement released at the end of the meeting, the committee said: 

“Recent indicators suggest that economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.” 

“The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.” 

“The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5.25 to 5.50% percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.” 

“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.” 

Realtor.com Chief Economist Danielle Hale commented on the news at the end of the meeting: 

“The Federal Reserve’s Open Market Committee, the rate-setting body that meets roughly eight times per year, voted to raise the short-term policy rate 25 basis points to a range of 5.25 to 5.50%. Despite recent inflation and labor market readings indicating slowing price increases and a more gradual pace of hiring, economic growth in the first quarter remained relatively robust, buoyed by consumer spending. With both inflation and unemployment running hotter than expected in an economy at full employment with stable price growth, the Fed chose to tighten further, bringing the cumulative monetary restriction in the Fed funds rate to 525 basis points or 5.25 percentage points.” 

“The impact of tighter policy continues to reverberate through the economy. Mortgage rates remain more than 3 percentage points above their pandemic-era lows. The combined impact of higher rates and higher home prices has driven the cost of financing the typical listed home up more than $250 or 12.4% from a year ago, and up more than $1,100 or 96.5% from June 2020, nearly doubling the cost in three years. 

“Higher mortgage rates cut into homebuyer purchasing power and have been an important brake on existing home sales from a more than 6.5 million unit pace in early 2022 to the 4.2 million unit pace in recent months. Perhaps more importantly, higher mortgage rates change the trade-up calculation for existing homeowners and are keeping as many as 1-in-7 out of the market because they don’t want to give up their existing low rate. As a result, I expect the number of homes for sale to decline this year, and continue to be a damper on home sales. Limited inventory is also keeping prices high even though housing affordability has deteriorated significantly in the past three years.” 

“Today’s hike cements the idea that the Fed is primarily focused on taming inflation and bringing it back to the 2% target. In June, the typical Fed member expected that today’s hike, and at least one other, would be warranted by the end of the year. I’m watching for any clues that these views may have changed as a result of June’s inflation data, or if there is a threshold for additional improvement that the Fed would want to see before pausing or ending the current tightening. June’s consumer inflation data were a significant improvement over recent months for both headline and core inflation.” 

“In fact, if the June monthly trends were sustained, which is optimistic, but not unfathomable, inflation as measured by the Consumer Price Index would be back to 2% in the first half of 2024, whether the measure is core or headline inflation. While we won’t get an updated summary of economic projections from the Fed at this meeting, I do expect some discussion of how members weighed this most recent piece of inflation data.” 

“I’m expecting cautious optimism from the Fed. I expect Chair Powell to express hope that the latest inflation data signal a new trend, which would raise the odds for a soft-landing. This would be consistent with rental listing prices declining and rental inflation trends having reached an inflection point. At the same time, I expect Chair Powell to insist that the Fed remains vigilant, which will likely mean that rates remain high for a bit longer, just in case this reading turns out to be an aberration." 

MBA SVP and Chief Economist Mike Fratantoni’s also had commentary following the Federal Reserve’s FOMC statement released this afternoon on monetary policy and the economy: 

“The FOMC increased short-term rates yet again at its July meeting, responding to high, but moderating inflation and a job market that remains quite strong. However, both are now moving in a direction which could allow this hike to be the Fed’s last for this cycle. We expect that to be the case, but for the Fed to hold off on any rate cuts until we are well into 2024.” 

“While the market for new home sales has recovered considerably over the past few months, the pace of overall housing market activity remains quite slow. Although the lack of inventory remains a constraint, housing affordability challenges continue to delay many potential buyers from entering the market. We do expect mortgage rates to trend down once the FOMC clearly signals that they have reached the peak for this cycle, as the reduction in uncertainty with respect to the direction of rates should narrow the spread of mortgage rates relative to Treasury benchmarks.” "The mortgage market, which will likely see another uptick in interest rates, may continue to be slow, as many consumers may hold off on making a home purchase in hopes that interest rates stabilize and hopefully, come down soon thereafter. It remains to be seen whether cooling inflation may help motivate consumers who had been holding off due to increasing cost of living expenses," added Michele Raneri, VP and Head of U.S. Research and Consulting at TransUnion. "Credit card interest rates will remain high, and those rates will likely tick up once again. Consumers should continue to be diligent to the extent they are able when using cards whether planning any late summer travel, doing back-to-school shopping, or simply paying for household expenses. As always, consumers should consider their ability to make monthly payments.”

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.