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It doesn’t take long for the financial outlook to change. Just over two weeks ago, the Federal Reserve was hinting at a 50 basis point increase in the fed funds rate for the March FOMC meeting. Within a matter of days, the forecast shifted from an aggressive move to possibly doing nothing. The Fed found itself stuck between a rock and a hard place following two large bank failures, fostering price stability versus financial stability. In the end, the committee seemed to compromise. The FOMC voted unanimously to increase the fed funds rate by 25 basis points to a target range of 4.75% to 5%, while suggesting this may be the last increase. Federal Reserve Chair Jerome Powell told reporters the committee considered a pause in the days leading up to the meeting, but there was a strong consensus to continue its rate hiking strategy.
The official press release from the two-day FOMC meeting contained notable word changes that the Chair emphasized during his press conference, from “will” and “ongoing” increases to “may” and “some” increases. The exchange of words suggested an intentional downshift in the committee’s ongoing strategy. Powell did a good job balancing the Fed’s goal for fighting inflation with rate hikes, while also leaving the door open for a pause. The quarterly Summary of Economic Projections (SEP) placed the median fed funds rate at 5.10% at the end of 2023, suggesting only one more rate increase this year with no plan to cut rates.
Powell told reporters during the press conference there is a need to continue raising rates due to the unacceptable high level of inflation, while also keeping an eye on financial and credit conditions. He addressed the recent bank failures and suggested the current banking crisis could result in tighter financial conditions, thereby doing some of the work for the Fed. Powell said it is very difficult to know if the recent developments will have a modest or significant impact on credit tightening, admitting “we just don’t know the effect of tighter conditions.” The Fed will need to closely monitor how banks react to credit lending in the months ahead. A recent report from the Fed revealed nearly 45% of banks had already tightened lending standards for commercial and industrial loans as recently as January. As for the bank issues, Powell described the banking system as “sound and resilient,” noting this month’s incident to be an outlier due to duration risk rather than broad weaknesses. Powell said it is clear “we need to strengthen supervision and regulation.”
Key Indicators this Week
Housing – Home sales recovered in February due to the recent dip in mortgage rates. Existing home sales rose 14.5% in February, the first monthly increase in a year and the biggest gain since July 2020. The increase reflects signed contracts in December and January when mortgage rates fell. Mortgage rates are now 60 basis points higher since January, which could dampen sales in the coming months. The median price of homes sold fell 0.2%, the first monthly drop in over a decade. The decline comes as more homes at the lower-to-middle price range were sold, versus higher-end homes. Sales of new homes also gained momentum, rising for the third month in a row. Builders continue to struggle to meet the demand for new homes, exacerbated by an inability to complete construction due to a lack of labor and high material costs. The number of homes sold but awaiting construction is at the highest level in 11 months.
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
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