Fed Raises Interest Rates by 25 Basis Points; Credit Conditions to Tighten

The Federal Reserve’s monetary policy committee raised the federal funds target rate by 25 basis points but indicated that it was moving to a more data dependent mode as markets digest incoming risks for banks.

The Fed is balancing two economic risks: ongoing elevated inflation and emerging risks to the banking system. The health of the regional and community bank system is critical to the availability of builder and developer financing — for for-sale, for-rent and affordable housing construction. We expect these conditions to tighten and will continue to monitor lending conditions via NAHB industry surveys.

Federal Reserve Chairman Jerome Powell noted that near-term uncertainty is high because of these risks, as well as impacts from policy actions taken to shore up liquidity.

Today’s increase of the fed funds rate moved that target to an upper rate of 5%. The Fed’s projections indicate that additional increases may be in store to achieve the level of tightening necessary to ultimately bring inflation back — over time — to the Fed’s target of 2%. The “may” in the prior sentence is intentional, as the more dovish tone of the Fed’s communication moves away from prior statements that additional firming of monetary policy is required without question.

The Fed noted: “The Committee will closely monitor incoming information and assess the implications for monetary policy. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”

Acknowledging the issues affecting a few regional banks, the Committee wrote: “The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.”

These challenges will result in tighter credit conditions, which will slow the economy and reduce inflation.

NAHB Chief Economist Robert Dietz provides more analysis in this Eye on Housing blog post.