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After his first Federal Open Market Committee (FOMC) meeting as Fed Chair, Jerome Powell announced that the Federal Reserve had increased the Fed funds rate by a quarter point at a target of 1.5 percent to 1.75 percent.
Powell had provided an upbeat assessment of the economy and inflationary trends during his Congressional testimony in the run-up to the meeting and the statement released by the Fed shortly after the meeting reflected the central bank's positive stance on the economy.
"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 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation," the bank said in its statement.
These rate hikes impact the housing market as mortgage rates, which have been rising steadily since the beginning of the year are expected to surge further on the back of this hike. The Fed has also been missing on its targets for mortgage holdings which could be another blow for mortgage rates.
“The Fed has been meeting its target on the treasuries but missing on the mortgage holdings,” said Tendayi Kapfidze, Chief Economist at Lending Tree. “Treasuries are down $41.2 billion since October but mortgages are actually up $2.0 billion. Thus the Fed has actually been detrimental to mortgage rates on the one hand by reducing its holdings of treasuries, but providing some support given that its mortgage holdings are not declining.”
“While the housing market could be healthier if kinks in the flow of new construction enabled builders to better meet demand, the overall health of the economy has led the Fed to announce an increase in rates in its meeting,” said Danielle Hale, Chief Economist at Realtor.com.
According to Kapfidze the Fed’s balance sheet normalization plan is set to have its second increase in April, which could raise the treasury security target to $18 billion a month and the MBS target to $12 billion a month. “Upward pressure on treasuries should increase and mortgage rates could see more upside in Q2 following the recent leveling off in rates. If the Fed begins to meet its MBS target, that would result in a further upward pressure,” he said.