It’s been a weird couple of weeks in the U.S. economy as headlines were filled with news of failing banks and government bailouts. However, one headline that many were waiting for was how the Federal Reserve would respond in the face of a possible banking crisis.
The uncertainty abated following, arguably, one of the most anticipated meetings of the past year when the Federal Reserve announced that it would raise interest rates by a quarter percent, pushing the federal funds rate between 4.75% and 5%.
The move comes mere weeks after the collapse of Silicon Valley Bank (SVB) and Signature Bank left many reeling and concerned for the nation’s economic future. In the wake of the recent turmoil of several banks over the past couple of weeks, the Fed claimed that “the U.S. banking system is sound and resilient.”
“Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation. The extent of these effects is uncertain,” read a Fed statement.
Wednesday’s rate hike marks the ninth consecutive increase that the Fed has made since starting its campaign to reel in inflation in March of last year. Officials hinted that they might end their rate hikes soon in a statement following their two-day meeting.
“The committee anticipates that some additional policy firming may be appropriate,” the statement said, deviating from the phrasing of their previous eight statements that said the committee anticipated “ongoing increases” in rates would be appropriate.
That was a similar sentiment that Fed Chairman Jerome Powell shared in a post-meeting press conference as he addressed recent developments in the banking sector in the past couple of weeks.
“Since our previous FOMC meeting, economic indicators have come in stronger than expected, demonstrating greater momentum in economic activity and inflation,” Powell said. “We believe, however, that events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses which would, in turn, affect economic outcomes.”
He acknowledged the “serious difficulties” of SVB and Signature Bank’s demise while justifying the federal government’s “decisive action to protect the U.S. economy” by bailing out both banks, backing their depositors, and hopefully fortifying public confidence in the financial sector.
“History has shown that isolated banking problems, if left unaddressed, can undermine confidence in healthy banks and threaten the ability of the banking system as a whole to play its vital role in supporting the savings and credit needs of households and businesses,” Powell says.
Arguing that the U.S. banking system is still sound following recent developments, Powell told attendees that the Fed is keeping tabs on the sector, stating that Fed officials are “prepared to use all of our tools as needed to keep it safe and sound.”
Wednesday’s messaging around banking was meant to exude confidence on the Fed’s part, and onlookers and pundits from the real estate industry suggested that the move to increase rates again signals a more foreboding position helped to drive that home.
The Fed stood between a rock and a hard place heading into its latest meeting, according to Bright MLS Chief Economist Dr. Lisa Sturtevant, who said officials were stuck battling conflicting goals of bringing inflation down with stabilizing uncertainty in the financial sector.
“Today’s decision suggests the Fed believes the worst of the banking crisis is behind us,” Sturtevant said in a statement. “The rate hike (Wednesday) also indicates that the Federal Reserve continues to view fighting inflation as its primary objective.”
With inflation still well above the Fed’s 2% desired reading, Sturtevant believes that focusing on the inflation fight and not on the banking situation could resonate with consumers who are more concerned about rising prices than banking, which is likely a large cohort of people.
Sturtevant stated that consumers should plan to see mortgage rates move higher after the Fed’s announcement, despite the recent dip that folks have seen following the bank failures.
During the conference, Powell admitted that the U.S. economy “slowed significantly” in 2022. While consumer spending picked up in the first quarter of 2023, he noted that activity in the housing market remains weak mainly due to the higher mortgage rate environment.
Experts from the Mortgage Bankers Association (MBA) expect the economic slowdown to continue for the next couple of quarters in 2023. According to MBA Chief Economist Mike Fratantoni, this year’s cooling effect could help bring inflation down further.
“Inflation is still quite high, but it is slowing, and while the job market is still quite strong, it is weakening, as evidenced by slowing wage growth,” he said in a statement. “Homebuyers in 2023 have shown themselves to be quite sensitive to any changes in mortgage rates.”
Fratantoni went on to state that the MBA is holding to its forecast that mortgage rates are likely to trend down this year, which should support the purchase market.
“The housing market was the first sector to slow as the result of tighter monetary policy and should be the first to benefit as policymakers slow—and ultimately stop—hiking rates,” he said.
Realtor.com® Economic Data Analyst Hannah Jones echoed similar sentiments in an emailed statement following the Fed’s meeting. However, she also acknowledged the tighter credit conditions that Powell hinted at in his post-meeting conference could yield additional hurdles for consumers in the housing market despite possibly helping reduce inflation.
“This could limit the need for ongoing monetary policy response,” Jones said. “Either way, this means that interest rates will likely remain elevated for the time being, making borrowing relatively expensive, including taking on a mortgage borrowing for a home purchase.
“Unfortunately for renters and potential buyers, the shelter index accelerated in February, climbing 0.8% month-over-month and 8.1% year-over-year as the cost of housing continues to run hot,” Jones continued. “On the plus side, however, data from private providers, including realtor.com®, show a clear deceleration trend in both asking rents and asking prices for homes. This moderation will eventually be picked up in the government’s inflation measure.”
