Federal Reserve Meeting 3/22/23

What to Know About the Federal Reserve's Latest Meeting

The Fed's Response to Banking Crisis & Inflation

Today, the Federal Reserve announced an interest rate increase of 25 basis points, the same increase they announced during their previous meeting in February. This current interest rate increase, however, exists in a drastically different environment than the previous interest rate increase. The Federal Reserve is not only facing an interest rate that is a full 4% higher than their stated goal of 2%, but they are also facing a banking crisis following the failure of Silicon Valley Bank, and Signature Bank. Additionally, First Republic Bank is teetering on the edge of collapse, being saved only by an infusion of cash from a collection of several other banks. This banking crisis has led the Fed to decrease the interest rates by 25 basis points instead of the previously projected 50 points basis hike that was expected to counteract inflation data that showed the disinflationary process had not been as effective as once thought.

How Else Can the Federal Reserve Impact the Economy To Fight Inflation and Aid the Economy?

In the Federal Reserve’s recent battles against inflation, the policy has been to influence the inflation rate by increasing the federal funds rate, which impacts how big banks borrow money from each other. This increase of the federal funds interest rate over the past year is what many are saying has led to the current banking crisis that we find ourselves in, a perspective that is strengthened when considering the decrease in the predicted basis point increase following the disappointing inflation data in recent months.

Increasing the federal funds rate, however, is not the only tool that the Fed has access to in order to influence the economy. In addition to adjusting the federal funds rate, the Fed can conduct open market operations, which is where the Federal Reserve either buys or sells Treasury bonds on the open market. This does impact interest rates, however, as whenever the Fed purchases bonds, the prices are pushed higher and the interest rates decrease, and vice versa when the Fed sells bonds instead, which they would do to combat inflation and decrease the money supply in the economy.

Additionally, the Fed can influence the reserve requirements for banks across the nation. The reserve requirement for a bank is basically how much of a deposit the bank must hold in its vault or with the Federal Reserve itself. For example, say you deposited $200 into your bank and the reserve requirement is 5%, the bank would need to hold onto $10 of that deposit. By increasing the reserve requirement, the Fed can decrease the amount of money a bank can lend out, and decrease the money supply in the economy in order to fight inflation.

How Does This Recent Change Affect Mortgage Rates?

In our previous blogs discussing the Federal Reserve meetings, we’ve talked about how the federal funds rate increases affect mortgage rates. The short answer is that while it does not directly affect mortgage rates, it does impact the banks that set mortgage rates, so there is somewhat of a trickle-down effect. What is important to note is that the current banking crisis has limited the ability of the Fed to continue increasing interest rates in the future, with many experts expecting the range to end up at 5% - 5.25%, which would be one additional increase from our current range of 4.75% - 5%. As the Federal Reserve eases up its pressure on banks across the nation, we could see mortgage rates level out in the coming months, and potentially even decrease to some degree.

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