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The Federal Reserve Open Market Committee voted to raise the federal funds target rate for the 10th time since March 2022 to more than 5%—a 16-year high. The latest rate increase of 25 basis points shifts the target range to 5% to 5.25% and is the third consecutive quarter point hike.

"There were no surprises in the Fed decision today given what we learned in March," says Zonda chief economist Ali Wolf. "The last time the Fed raised rates, a week following the collapse of Silicon Valley Bank, they communicated to the public that getting inflation in check was their No. 1 priority. It was all but guaranteed that the Fed would go 25 basis points at the May meeting since inflation remains elevated and the labor market strong."

In a statement announcing the increase, the Federal Reserve noted that while economic activity expanded “at a modest pace” in the first quarter and job gains remained robust, inflation levels have remained elevated. In March, the Consumer Price Index increased marginally month over month but increased 5% on a year-over-year basis. The Federal Reserve reiterated its goals of achieving both maximum employment and inflation at the rate of 2%.

“In determining the extent to which additional policy firming 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,” the committee wrote.

"The Fed hinted at a potential pause from here. A pause is our base case for the economy assuming both the labor market and inflation continue to trend in a healthier direction," Wolf says. "If the Fed does decide to pause, it will give them time to track incoming economic data to see if they need to hike more, continue to pause, or actually start cutting rates."

In the release announcing the rate hike, the Federal Reserve said, despite concern and uncertainty surrounding the banking system following several bank failures, the banking system has remained “sound and resilient.” Tighter credit conditions could "weigh on" economic activity, hiring, and inflation, though the extent of these effects remain uncertain, according to the committee.

"As the Fed raises short-term interest rates, we’ve seen that mortgage rates have actually come down in response to some of the broader economic concerns," Wolf says. "The biggest way I see the Fed rate hikes impacting the housing market is on the builder finance side. We know there has been some tightening of credit following the recent banking turmoil and the higher mortgage rates will only make construction financing more complicated—and expensive."