'We're Closer to the End': Fed Chair Hints Pause Likely in Rate Hikes

Six weeks ago the Fed said it might pause its rate hikes if the economy worsened significantly in the wake of two bank failures.

However, the failure of a third bank Monday and weakening economic growth wasn’t enough to deter the Federal Open Market Committee from deciding Wednesday to raise rates another 25 basis points, bringing the target range for the federal funds rate to 5.00% to 5.25%.

Fed Chair Jerome Powell said FOMC members did discuss pausing rates during their two-day meeting that ended Wednesday, but he said there was broad support for the 25 bps hike this meeting, while members discussed pausing rate hikes at the next meeting on June 13-14.

“There was a sense that we’re closer to the end … and we may already be there,” Powell said.

The Fed’s target range was at 1.5% to 1.75% in January 2020. After COVID-19 was declared a pandemic, the range fell to 0 to 0.25%, where it remained through February 2022.

Starting with a 25 bps hike in March 2022, the Fed has now raised rates 10 times without pause.

NAFCU Chief Economist Curt Long noted that the Fed’s policy statement omitted the text from March that had signaled further rate hikes.

“The committee left themselves room to change course, but for now it appears that the committee’s preference is to leave rates at their present level until there is meaningful progress on the inflation front,” Long said.

Powell had discussed the possibility of a pause on the horizon when announcing a 25 bps rate hike after its last meeting March 22. In part, it was based on the idea that credit tightening might be achieved at least in part by the failures early that month of Silicon Valley Bank of Santa Clara, Calif., and Signature Bank of New York.

On Wednesday, Powell said despite the weak 1.1% GDP growth in the first quarter, it was growth accompanied by a strong labor market and inflation still well above the Fed’s 2% target.

The failure of the third bank — First Republic of San Francisco on Monday — had little impact on deciding on the rate hike because it was already in the FOMC’s calculations at its last meeting. So when it met Tuesday and Wednesday, Powell said the troubles of the three banks had “all been resolved.”

But a pause might be in order now. Powell noted that half of the FOMC members polled in March said they expected 5.25% to be the maximum rate needed to get inflation back to 2%.

Powell said inflation is slowing, and the Fed expects returning to 2% will be a slow process. At each future meeting, the Fed will see whether the trend is continuing or whether inflation is worsening and further rate hikes are necessary.

In March, Fed economists predicted a mild recession by the end of the year, and Powell said their assessment was “broadly similar” at this meeting. He still hopes to avoid a recession, although he said history is not on his side.

“We always have to balance the risk of not doing enough and, and not getting inflation under control, against the risk of maybe slowing down economic activity too much,” Powell said. “We thought that this rate hike along with the meaningful change in our policy statement was the right way to balance that.”

Mike Fratantoni, chief economist for the Mortgage Bankers Association, said inflation is likely to trend down over the course of the year, particularly as weakness in the apartment rental market begins to be reflected in the inflation numbers.

Fratantoni said the housing sector has already suffered the bulk of the blow from higher rates, and the current trend of falling mortgages rates are likely to have a greater benefit than the harm from the latest rate hike.

“The housing market is likely pulling the economy out of this slowdown, as it typically does,” Fratantoni said.

“While lower mortgage rates will help with affordability, they won’t solve for the lack of inventory on the market, particularly of existing homes. This lack of supply will continue to be the primary constraint on home sales through 2023.”