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The Line: The Fed Acts

Updated: Mar 25, 2022

Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.

The Fed acts

The Federal Reserve announced last Wednesday that it’s raising rates for the first time since 2018, increasing the federal funds rate by 0.25%. This brings thetarget federal funds rate to a range of between 0.25% and 0.50%. The move was expected, although many economists were hoping for a 0.50% increase to combat the surge in prices over the past year. The Fed also indicated it will hike rates six more times this year, which would bring the federal funds rate up to near 2% by the end of 2022.

If that sounds like a lot of rate hikes, that’s because it is. But two things to keep in mind:

  • The Fed needs to get inflation under control.

  • A 2% federal funds rate is still very low.

The Fed will also start reducing the amount of Treasury bonds and mortgage-backed securities it owns. This is called "quantitative tightening," where the Fed sells its holdings to remove money from the economy. You may remember its opposite, "quantitative easing," from the financial crisis.

So, what does this mean for borrowers?

Initially, not much, but each additional hike will help push most rates higher. Short-term rates—like credit cards—will see the most immediate impact. Longer-term rates such as 30-year mortgages are not directly impacted by Fed action, but since they are based on inflation expectations, they will most likely trend higher for a while. As I’ve mentioned before, 30-year rates may even tick down as the Fed’s action brings inflation lower. We’ve also seen mortgage rates dip recently in response to the turmoil in the stock market.

What does this mean for the economy?

Since the purpose of raising rates is to slow the economy down in order to bring inflation under control, we can expect slower growth in the months ahead. The good news is that the Fed is confident the economy can absorb these rate hikes without the risk of recession. Their just-released economic projections have GDP growing 2.8% this year, with the unemployment rate falling to 3.5%.

To sum up, while the Fed was a bit late to the party, this week’s announcement indicates they are ready and able to do what’s needed to bring inflation under control. Remember that changes to monetary policy do take several months before you see results, so we must be patient. The invasion of Ukraine also makes this "soft landing" the Fed is looking for a bit trickier to obtain.

Economic invasion

More Good News on the Labor Market

Initial claims for unemployment recently fell by more than expected, to 214,000. Continuing claims dropped to just under 1.42 million, their lowest level since February 21, 1970, which was the day after I was born. Who said I don’t bring good luck?

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