Fed hikes rates by 75 bps to rein in still-hot inflation

The Federal Reserve (Fed) on Wednesday raised the federal funds rate by another 75 basis points, to 3%-3.25%, bringing it back to a level last seen in March 2008.

The decision was expected by most Fed observers, and comes as mortgage lenders and real estate brokerages struggle to adjust to a Fed-driven slowdown of the housing market. 

According to the Federal Open Market Committee (FOMC) statement, although recent indicators point to modest growth in spending and production, job gains have been robust in recent months and the unemployment rate has remained low.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the FOMC said in the Wednesday statement. “Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity.”

The committee anticipates that ongoing increases in the target range will be appropriate, meaning another 125 basis points in hikes still to come in 2022, with a federal funds rate topping out well above 4%. The FOMC’s Summary of Economic Projections now shows a funds rate midpoint of 4.375% at end-2022 and 4.625% at end-2023.

“No changes were made with respect to their ongoing plans to reduce the size of their balance sheet,” said Mike Fratantoni, the chief economist of the Mortgage Bankers Association. “Rate volatility is high due to both uncertainty regarding the Fed’s next moves and the lack of a steady, consistent buyer for Treasuries, and particularly mortgage-backed securities.”

Since the Fed has started a tightening monetary policy to slow inflation, it has resulted in a cumulative 300 bps hike: 25 bps in March, 50 bps in May and three 75 bps increases in June, July and September.

Inflationary pressures resulted from the decision to maintain rates at 0%-0.25% between March 2020 and March 2022 to stimulate economic activity during the COVID-19 pandemic, marking a period of easy money that gave rise to the hottest mortgage market in U.S. history. 

Consequently, inflation in the U.S. hit 8.3% in August, down from 8.5% in July but still higher than the 8.1% expected by observers, the Bureau of Labor Statistics reported on Sept. 13. One of the primary drivers has been housing costs, with shelter costs accounting for about 25% of inflation in August. Shelter costs rose 6.2% in August from a year before, and were up from 5.7% in July.

That inflation came in hot raised the specter that the Fed would increase the benchmark rate by 75 or even 100 bps today.

In the housing market, the tightening monetary policy has brought mortgage rates to the mid-6% level and helped bring rents to record prices, according to firms that track the rental market.

Existing-home sales declined in August for the seventh consecutive month and home prices dropped sequentially from July, evidence that the Fed’s policies have cooled the housing market in recent months.

According to the Fed’s latest Beige Book report, home sales fell across all 12 Fed districts and the prospects for future improvement anytime soon are dim as well. “The outlook for future economic growth remained generally weak, with … expectations for further softening of demand over the next six to 12 months,” the report states.

“We’ve had a time of a red-hot housing market all over the country – famously, houses were selling to the first buyers by 10% above the asked, before they even see the house. So, it was a big imbalance between supply and demand and house prices were going up at an unsustainable fast level,” Fed Chairman Jerome Powell said during a press conference. “Builders are having a hard time to find lots, workers and materials.”

But Powell said the deceleration in prices should bring the market closer to its fundamentals, which is a good thing, according to him. “For the longer term, what we need is supply and demand to get better aligned, so house prices go up at a more reasonable pace and people can afford houses. Probably, the housing market needs to go to a correction to get to that place.”

Rate hikes also impact real estate investors. “Debt is becoming very expensive very quickly,” said Veena Jetti, founder of the Dallas-based real estate investment firm Vive Funds. “We will likely see operators that bought in the last few years without interest rate insurance finding it tough to service the debt.”

Whether the latest rate hike has already been ‘baked in’ to mortgage rates remains to be seen. “It’s possible that expectations of a rate hike are already priced into the market, as we just saw mortgage rates hit 6% last week,” said Steve Reich, chief operations officer at Finance of America Mortgage. “Interest rates hitting their highest levels since 2008 coupled with persistent inflation means some homebuyers may take a step back from the market and wait until rates come down. However, there are still opportunities in today’s market for potential homebuyers.”

The post Fed hikes rates by 75 bps to rein in still-hot inflation appeared first on HousingWire.

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