The Fed hikes interest rates again by 75 basis points but hints at a break in the future

HousingWire / Fortune

Fed delivers another 75 bps rate hike

Federal funds rate, now at the 3.75%-4% range, may cause further slow downs in the housing market

Amid a surprisingly strong U.S. economic performance and persistent inflation, the Federal Reserve on Wednesday raised the federal funds rate by another 75 basis points, to 3.75%-4%, launching it to the highest level since December 2007.

The decision, expected by most Fed observers and the financial markets, is intended to further slow down the housing market. 

The Fed’s tightening monetary policy, which started in March, has resulted in a cumulative 375 bps hike: 25 bps in March, 50 bps in May, and four subsequent 75 bps increases in June, July, September and November. 

The Fed is hiking rates to rein in still-hot inflation, which hit 8.2% over the last 12 months, rising by 0.4% in September and 0.1% in August, according to an October 13 report by the Bureau of Labor Statistics

Increases in the shelter, food and medical care indexes were the largest contributors to the monthly seasonally adjusted all items growth. According to the BLS, shelter increased by 0.7% monthly and 6.6% in 12 months.

The Fed is also looking at the overall U.S. economic performance. GDP in the third quarter grew at a rate of 2.6%, breaking the negative GDP streak from the past two quarters.

According to the Federal Open Market Committee (FOMC) statement, despite recent indicators pointing to modest growth in spending and production, job gains have been robust, 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 statement. “Russia’s war against Ukraine (…) and related events are creating additional upward pressure on inflation and are weighing on global economic activity.”

Impact on the housing market

The Fed’s monetary policy has had a significant impact on the housing market in recent months, pushing mortgage rates to the 7% level and sending home sales on a downward spiral. 

“In the mortgage market, consumers who may otherwise be considering buying a home may choose to continue to hold onto their down payments, waiting to see if interest rates and/or home prices decline in the not-too-distant future,” Michele Raneri, TransUnion’s vice president of financial services research and consulting, said in a statement. 

Aside from rate hikes, the Fed’s moves can also impact the housing sector via the mortgage-backed securities market. 

“The Fed knows housing is in a recession, and higher mortgage rates will make things worse for the sector, so they’re not going to make that situation any worse than it is by selling off mortgage-backed securities,” said Logan Mohtashami, HousingWire’s lead analyst. 

Fed Chairman Jerome Powell said during a press conference on Wednesday that the housing market has been significantly affected by higher rates, which are back where they were before the global financial crisis. However, it’s important to consider that the housing market overheated for a couple of years during the pandemic due to low rates, he said.

“So, the housing market needs to get back into a balance between supply and demand,” Powell said. “From a financial stability standpoint, we didn’t see in this cycle the poor credit underwriting that we saw before the global financial crisis because housing credit was very carefully managed by the lenders.”

Further increases expected

Further increases in the federal fund rates are expected for this year.

“To be clear, the question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep the monetary policy restrictive,” Powell said. “I would say it’s premature to discuss pausing (the rate hikes).”

The Fed’s next meeting will be held on Dec. 13 and 14 – and economists have started to discuss what will happen next. 

“The Federal Reserve is in a state where they need to figure out what to do next: they want a job loss recession and are seeing some weaker economic data, so they need to start talking about slowing down the rate hikes,” Mohtashami said. “Then the labor market is still staying positive for them, making their forecast for a job loss recession next year look off.”  

Mohtashami said that the Fed needs to take a stand on where they want to go with rate hikes and how strong they want the U.S. dollar to be. “Do they want a soft landing where the economic pain is minor, or do they want to make the economy worse in the fight to destroy inflation?” he said.

Regarding a soft landing, Powell said that it’s still possible, but the path has narrowed, because “we haven’t seen inflation coming down to what we would expect by now,” due, for example, to supply side problems.

Roger Ferguson, former vice chairman of the board of governors of the U.S. Federal Reserve System, believes the Fed will continue its tightening policy across the next three meetings, with a 50 basis points hike in December and two 25 basis points hikes at the start of 2023. 

“I fear that, if I’m wrong, it’s because I’ve underestimated (the rate hikes),” he said during the Mortgage Bankers Association (MBA) annual conference in Nashville. “Rates will probably stay there (at the peak) for much longer than people want. But at the end of the day, I hope for a short and shallow recession”.

According to Bright MLS chief economist Lisa Sturtevant, there are two basic near-term scenarios. First, if inflation remains stubbornly high, mortgage rates could climb to 8% or beyond in late 2022 and into the first part of 2023. 

Alternatively, inflation could ease, meaning mortgage rates could stabilize, though they will likely remain above 6% through the first part of 2023.

“If the Fed chair Powell continues to be transparent, investors will be able to digest those increases as long as they can see the Fed’s actions are making a difference,” Sturtevant said. 

The issue will be whether inflation continues to clock in above 8%, she said.

“That’s when people will start saying, ‘Look, we’ve been with you, ready to take the pain now to avoid pain later, but the pain we are taking now does not appear to be mitigating the pain later,” Sturtevant said.

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Federal Reserve officials delivered their fourth straight 75 basis-point interest rate increase while also signaling their aggressive campaign to curb inflation could be approaching its final phase.

The Fed said that “ongoing increases” will likely be needed to bring rates to a level that is “sufficiently restrictive to return inflation to 2% over time,” according to the Federal Open Market Committee’s statement released in Washington Wednesday following a two-day meeting.

In a new sentence in the statement, the Fed also said: “In determining the pace of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

The fresh language comes amid still-strong readings on inflation and jobs, even as sectors like housing and manufacturing have slowed substantially. 

The unanimous decision lifts the target for the benchmark federal funds rate to a range of 3.75% to 4%, its highest level since 2008. 

US stocks erased an earlier drop after the news, while yields on 10-year Treasuries stayed lower. The dollar deepened declines.

The statement firmly committed policymakers to their campaign to curb inflation, but acknowledged that interest-rate increases act with a lag.

Chair Jerome Powell will have a chance to elaborate on the outlook for future meetings at his press conference at 2:30 p.m. in Washington.

Investors are looking to him to discuss whether the Fed will slow the pace of rate increases at its next meeting in December.

Election Near

Officials, fighting to curb inflation running near a 40-year high, gathered days before midterm US congressional elections in which anger over price pressures has been a dominant theme.

The outcome of the Nov. 8 vote could cost President Joe Biden‘s Democrats control of Congress, and some prominent lawmakers in his party have started to publicly urge the Fed to show restraint. Powell, for his part, has tried to keep the central bank out of the political fray.

Officials, as expected, said they will continue to reduce their holdings of Treasuries and mortgage-backed securities as planned — a pace amounting to about $1.1 trillion a year.

The higher rates go, the harder the Fed’s job becomes. Having been criticized for missing the stubbornness of the inflation surge, officials know that monetary policy works with a lag and that the tighter it becomes the more it not only slows inflation, but economic growth and hiring too.

Fed forecasts in September implied a downshift to 50 basis points in December, according to the median projection. Those projections showed rates reaching 4.4% this year and 4.6% next year, before cuts in 2024.

Additional Data

No fresh estimates were released at this meeting and they won’t be updated again until officials gather Dec. 13-14, when they will have two more months of data on employment and consumer inflation in hand.

Economists surveyed by Bloomberg late last month were looking for a 50 basis-point increase in December, but almost a third had penciled in a fifth 75 basis-point hike. They saw rates peaking at 5% next year.

Investors saw a similar path: Pricing in financial futures markets earlier on Wednesday was split between a 50 and 75 basis-point increase in December, with rates peaking slightly above 5% during 2023.

The Fed’s most forceful tightening campaign since the 1980s is beginning to cool some parts of the economy, particularly in housing. But policymakers have yet to see meaningful progress on inflation.

Nor has there been a significant loosening in the job market, with unemployment in September matching a half-century low of 3.5%.

Employer demand for workers has also remained strong, with 1.9 job vacancies for every unemployed person in America, according to Labor Department data Tuesday.

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