The Federal Open Markets Committee (FOMC) meets Tuesday and Wednesday of this week. Market participants anticipate that officials will raise interest rates by 50 basis points, the first hike of more than 25 basis points since 2000.
The Fed will also likely announce plans to roll assets off the central bank’s balance sheet, which it has alluded to until now.
“We really are committed to using our tools to get 2% inflation back,” Fed Chairman Jerome Powell said this month. “It is appropriate in my view to be moving a little more quickly. And I also think there is something in the idea of front-end loading … that points to the direction of 50 basis points being on the table.”
U.S. stock indexes saw losses in the last week as the market priced in likely rate hikes. The Nasdaq composite had its worst four-month starting performance since 1971.
“By the end of trading on Friday, the selloff had gotten worse and we were staring at the worst start to a year since the Great Depression,” Ben Levisohn wrote for Barron’s.
Crypto markets have taken a turn as well. Bitcoin.com reported that bitcoin dropped below the $38K mark to $37,597 per unit this past Saturday evening. The crypto economy “has shed 8.99% against the U.S. dollar since April 25, dropping from $1.967 trillion to $1.79 trillion,” the website reads.
Some analysts say the Fed is moving big this week because of fear that it’s late to the game on fighting inflation.
“From the Fed’s perspective, they at this stage are willing to trade a little GDP and a little bit of unemployment to get the inflation rate down,” Jim Smigiel, SEI Investments chief investment officer, told Yahoo Finance Live.
“I think they feel as though they’re backed into a bit of a corner. Nothing that’s happening today is going to set them off course. They’re going to be coming in early and guns blazing a bit.”
But others note that the Fed is still holding back when it comes to rate increases. St. Louis Fed President James Bullard has said that rates of 3%, 3.25%, or even 3.5% would be appropriate this year. But Powell is expected to stay well below these levels.
“As much as this Fed says it will be aggressive, Chair Powell still appears to be more conservative than other members,” Joel Naroff, president of Naroff Economics LLC, told Bloomberg. He said he expects one or two half-point increases.
Regardless of the exact amount, the impact on mortgage interest rates is expected to be felt immediately in the housing market.
“Even though much of this is anticipated, when short-term rates rise, there’s going to be a bump in mortgage rates and a bump in the cost of capital — and that will happen immediately,” Jeffrey Bergstrand, an economics and finance professor at the University of Notre Dame and former economist for the Federal Reserve Bank of Boston, told the Washington Post.
“Some families just won’t be able to afford those higher monthly payments on a new house or a new car. That will reduce the demand for those things and have a slowing effect on the economy.”