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In what was deemed a “game-time decision” by Fed Chair Jerome Powell, the FOMC has opted to raise the Federal Funds Rate by .25%, or 25 bps, according to the statement released today. The target FFR is now 4.75-5%, which is now the highest it has been since 2007. The statement also proclaimed that the “U.S. banking system is sound and resilient”, and reiterated the focus of the committee will remain on inflation. Powell further stated that the Federal Reserve is “prepared to use all our tools” to the keep the banking system safe and sound.

In addition to the 25bps raise, the FOMC has not stated if they intend to institute further increases this year. Instead, they provided what would be considered a muted position, stating they are firmly committed to returning inflation to their 2% long-term 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 statement indicated. “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.”

A whipsaw of speculation leading up to the FOMC meeting

In a Senate Committee meeting on March 7th, Chair Powell warned that inflation was still too high, which shifted expectations on Wall Street from a “hold” position to an increase of 25-50bps. While inflation is not near the June 2022 high of 7%, it is still well beyond the FOMC target of 2%, with Powell citing strong employment numbers and an unemployment number of 3.4% as the main culprits.

On March 10th, however, the collapse of Silicon Valley Bank and the subsequent run on three other banks led many economists to anticipate a “no rate increase” move by the FOMC. This sentiment was echoed by Goldman Sachs economist Jan Hatzius, who stated, “In light of the stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its next meeting on March 22.”

The beat on the street

Immediate reactions to the move by the FOMC have ranged from frustration to folks choosing to look at the “big picture” issues. Those issues are lack of affordable housing, borrower education, and rising mortgage rates. 

In further testimony from Powell at the Semiannual Monetary Policy Meeting, he specifically speaks to housing as the one category of core services that are experiencing disinflation, even though it accounts for more than half of core consumer expenditures. Herein lies the rub: If housing accounts for over half of CCE and is experiencing disinflation, how will higher mortgage rates help combat this issue? “This is ridiculous, “states Nathan Thompson, Global Training Manager at Ecolabs. He is also a former homeowner and has been looking for a new home to buy in Minneapolis for over a year. “My house budget just dropped another $50k!”.

Brian Vieaux, President and COO of FinLocker, responded more pragmatically to the increase and how the more significant issue remains to educate homeowners. “Regardless of the message & direction from the Fed regarding rates, it is clearer than ever to me that the first-time home buyer segment remains starved for help in understanding the process, their financial situation, and how it relates to their ‘readiness’ for homeownership,” he said. 

“Loan Originators have an opportunity to fill that need but must commit to an “all in” Up-Funnel strategy that focuses on financial literacy, financial fitness, and financial preparation. The days of “easy deals falling from trees” are long gone.  Those who work in today to grow their database will be the winners on the other side.”

What are your thoughts on the recent moves by the FOMC? Email [email protected] or comment below!