Fed Raises Federal Funds Rate Again

The Federal Open Market Committee, as expected, raised the federal funds rate again at the conclusion of its two-day meeting yesterday, citing a stronger economy and an uptick in inflationary indicators.

The federal funds rate now stands between 0.75 percent and 1 percent, its highest level since 2007. Yesterday’s increase marked the second increase in four months and the third increase after nine years of holding the rate at nearly zero.

“Near-term risks to the economic outlook appear roughly balanced,” the FOMC said in its statement.

Mortgage Banker Association Chief Economist Mike Fratantoni said the FOMC statement indicated that the Fed is still in no hurry to raise short-term rates, still seeing inflation falling somewhat short of their 2 percent target.

“While they are confident that the economy will keep growing, as monetary policy remains accommodative, there was no indication that they are worried about the economy overheating, even with the quite rapid job growth we have seen thus far this year,” Fratantoni said. “Moreover, there was a single, dovish dissent from Neel Kashkari who preferred keep the fed funds target unchanged. Finally, there was no change to the language regarding the Fed’s intention to maintain the size of their balance sheet. Given Chair [Janet] Yellen’s recent testimony and comment by other Fed officials, we expect a change to their balance sheet policy to be announced at some point this year. Markets will likely react to this announcement, and not wait for the actual implementation of a change in balance sheet policy.”

Mark Fleming, chief economist with First American Financial Corp., Santa Ana, Calif., noted the market already priced this rate increase into the 30-year, fixed-rate mortgage, rising to 4.21 percent last week on the expectation.

“Reports have suggested, or surely will, that this rise in mortgage rates will be the demise of the housing market. That’s just not so,” Fleming said. “Affordability remains high and our survey data shows that mortgage rates would have to be significantly higher to have any meaningful impact.”

Fleming said First American research suggests higher mortgage rates-as high as 4.75 percent-would not necessarily deter buyers. “Even at the higher mortgage rate, for the majority of markets a median income can purchase more than the median priced house,” he said. “The house buying power that borrowers have, even with rates below 5 percent, still remains historically strong. It would take a significantly higher mortgage rate to significantly erode the real, house-buying power adjusted, price of housing.”

Fratantoni said MBA hold to its forecast that the Fed will raise rates twice more this year, likely in June and September. “These moves get us closer to the point where the Fed will start to allow their holdings of longer-term Treasuries and mortgage-backed securities to run-off,” he said. “Given the size of their holdings and current market conditions, balance sheet runoff could have an even larger impact on mortgage markets than changes in their short-term rate target.”

The FOMC statement appears below:

Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the Committee’s 2 percent longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.