Fed Board Softens Stance on Future Rate Hikes

As expected, the Federal Open Market Committee (FOMC) raised the fed funds target 0.25 percentage points to a range of 4.75%-to-5.00% on March 22. The FOMC softened their forward guidance: Where the previous statement read that “ongoing increases in the target range will be appropriate,” the March statement reads, “some additional policy firming may be appropriate” (our emphasis). The statement also said that recent developments in the banking system “are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.”

In the quarterly survey of Fed policymakers (the “Dot Plot”), the median forecast was for 0.4 % year-over-year real GDP growth in the fourth quarter of 2023, down from 0.5% in the December Dot Plot. This is still higher than the 0.2% median in Bloomberg’s March private consensus survey, which was compiled before the failures of Silicon Valley Bank and Signature Bank. The Dot Plot projects the unemployment rate rising to 4.5% in the fourth quarter of this year from 3.6% in February, and PCE inflation of 3.3%.

Fed policymakers continue to anticipate raising rates to 5.00%-to-5.25% by 2023 year-end, implying one more quarter percentage point hike this year and no cuts. But, given the obvious risk that the economy underperforms the Fed’s relatively sunny projections, the Fed is more likely than not done with raising rates this year. If so, an initial rate cut would probably come within three to nine months, depending on how quickly a slowing economy reduces wage growth and broader inflationary pressures.

New home sales rose 1.1% to a 640,000 annualized rate in February. The median price of a new home sold rose 2.7% on the month to $438,200.  Sales of existing homes, accounting for roughly 90% of all house sales, soared 14.5% to 4.58 million, snapping twelve consecutive monthly declines.

The median sale price of an existing home rose 0.5% to $363,000, the first increase in eight months. Better-than-expected home sales in February, like retail sales and job growth, in part reflect boosts from unseasonably warm weather and seasonal adjustment (February is usually a slow month for home sales).

Bill Adams is senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica.