Despite economic uncertainty and financial turmoil following Silicon Valley Bank’s (SVB) collapse, the Federal Reserve Open Market Committee voted to raise the federal funds target rate by a quarter percentage point to a target range of 4.75% to 5%.
During Zonda’s most recent National Housing Market Update webinar, chief economist Ali Wolf said a 50-basis-point increase was “almost guaranteed” given market conditions prior to the SVB collapse. However, concerns over financial stability in the aftermath of the collapse caused many to forecast either a 25-bp increase or no increase to the federal funds target rate.
“The Federal Reserve had a tough choice today—should they pause given the uncertainty in the banking sector, or should they move forward given inflation is too high? The Fed decided the latter was a bigger concern and raised short-term interest rates 25 bps,” says Wolf.
The latest rate hike is the second consecutive 25-bp hike and the ninth overall as part of the Federal Reserve’s continued efforts to cool inflation. Recent indicators signaled modest growth in spending and production, while job growth continues to run “at a robust pace,” according to the committee.
Inflation has remained elevated, despite showing signs of decelerating. According to the U.S. Bureau of Labor Statistics, price growth cooled to an annual rate of 6% in February, slightly lower than the January level of 6.4% and well below the 9% peak during summer 2022. However, inflation remains significantly above the Federal Reserve’s target of 2%.
“The Fed may be done raising rates at this point or may do another increase in May, depending on what happens with consumer spending, inflation, and financial stability,” Wolf says.
In the release announcing the rate hike, the Federal Reserve said despite the financial uncertainty, the banking system “is sound and resilient.” The Federal Reserve added recent developments are “likely to result in tighter credit conditions for households and businesses” and impact economic activity, hiring, and inflation. The extent of the tightening’s impact on economic factors, however, is uncertain.
“The Fed said there’s a chance they don’t have to raise short-term rates again if tighter credit slows demand and inflation,” Wolf says. “Zonda surveyed builders on credit availability, and roughly a third believe that conditions may tighten for home building as well.”
The committee said it 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 when determining the extent or necessity of future increases in the target range. According to the committee, it is prepared to adjust the stance of monetary policy “as appropriate if risks emerge that could impede attainment of the committee’s goals.”
