With little surprise, the Federal Reserve announced a larger rate hike Wednesday following their two-day meeting this week, accelerating the central bank’s efforts to curb rampant inflation and pull back from pandemic relief efforts.
The 50-basis point increase is the largest single jump in over two decades, and was telegraphed by Fed chair Jerome Powell over the last couple months as the war in Ukraine and persistent worldwide inflationary pressures increased the urgency for the central bank to do something.
“With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2% objective and the labor market to remain strong,” the Fed wrote in a release following the meeting. In support of these goals, the Committee decided to raise the target range for the federal funds rate…and anticipates that ongoing increases in the target range will be appropriate.”
With a direct relationship between the federal fund rate and mortgage rates, along with essentially every other financial sector, the decision to accelerate raising those interest rates will certainly affect the national housing market—though the timing and intensity of that effect is hard to predict.
“This vote alone is unlikely to spark a new surge in mortgage rates,” said Danielle Hale, chief economist for Realtor.com in a statement. “Mortgage rates have already anticipated a fair amount of Fed tightening, but the market continues to ratchet up expectations for big Fed hikes throughout the rest of the year, already expecting a 75 basis point hike at June’s meeting.”
After many economists predicted a slower raising of rates—mostly anticipating 25-basis point hikes spread out across 2022—the war in Ukraine and higher than expected inflation appears to have accelerated policymakers’ attempts to cool off the economy. The Fed has also indicated it will reduce its holdings in securities, including mortgage-backed securities (MBS) beginning on June 1, shedding $47.5 billion for the first three months before accelerating to $95 billion per month.
“The Committee is prepared to adjust any of the details of its approach to reducing the size of the balance sheet in light of economic and financial developments,” the Fed added in its statement.
Mike Fratantoni, chief economist for the Mortgage Banker Association (MBA), said in a statement that a lack of clarity on the specific endgame of the balance sheet plan could cause issues in the MBS markets.
“Importantly, neither the statement nor the balance sheet plan repeated the goal of returning the balance sheet to all Treasuries, and there was no mention about the potential for active MBS sales. Musing about active sales has likely increased volatility in the MBS market recently, as investors do not know how to interpret the vague signals that had been given,” he said.
Hale said how markets and the mortgage industry specifically respond will be based both on these potentially evolving plans as well as expectations from market participants.
“There’s both upside and downside risk for mortgage rates. If the Fed continues to focus on inflation, and the rate increases and balance sheet reduction it believes are needed to tame price growth, that will reinforce the current market view, and keep mortgage rates climbing,” she said. “At the same time, it means that expectations are very high, and if the Fed shows any hint of hesitancy in its resolve to reign in inflation, markets could expect a slower path of increases which would give rates a bit of breathing room.”
National Association of REALTORS® (NAR) chief economist Lawrence Yun said at a recent legislative meeting that real estate professionals have already been hit with some “curveballs” in 2022, and predicted inflation and rising mortgage rates would continue to be an issue.
“Mortgages now compared to just a few months ago are costing more money for home buyers,” he said. “For a median-priced home, the price difference is $300 to $400 more per month, which is a hefty toll for a working family.”
Fratantoni predicted that mortgage rates would likely peak at or near current rates.
“Once we are past this rate spike and associated volatility, MBA expects that potential homebuyers may be more willing to re-enter the market. Given how much higher rates will remain above the past two years, we do not expect refinance demand to increase any time soon,” he said.
Another thing that will almost certainly affect markets, according to Hale, is Powell’s more qualitative actions—how he evaluates the economy and speaks about inflation in various testimonies and public appearances.
In a press conference following the May meeting, Powell struck a cautious tone, saying that he expected to be able to cool labor demand and inflation but that solving these big problems would be “extremely challenging.”
“Inflation is much too high and we understand the hardship it is causing and we are moving expeditiously to bring it back down. We have both the tools we need and the resolve it will take,” Powell said. “It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.”
The Fed is not currently “actively considering” a 75-basis point increase, Powell said, but that “if higher rates are required, we won’t hesitate to deliver them.” A so-called “wage-price” spiral is not something that Powell said he sees right now, but it’s a risk that the Fed “can’t allow to happen.”
Reaching a “soft landing”—slowing down a hot economy without falling into recession—is achievable, Powell said—though he added the Fed wouldn’t hesitate to implement “restrictive” policy if that were the only way to achieve goals. He would not say when asked directly whether the Fed could curb inflation and maintain a positive labor market without solutions to supply chain issues, only that it was “a very difficult situation.”
“I do expect that this will be very challenging…and it may well depend on events that are not under our control. Our job is to use our tools to try to achieve that outcome, and that’s what we’re going to do,” Powell said.
Markets reacted positively to the Fed’s decisions and Powell’s comments, with all three major indices rising following the meeting. The Nasdaq closed up 3.41% on the day, the S&P jumped 2.99% and the Dow gained 2.81% on the day.
The Fed’s next meeting is scheduled for June 14 and 15.
Jesse Williams is RISMedia’s associate online editor. Email him your real estate news to firstname.lastname@example.org.
Editor’s note: this story was updated to reflect stock gains after market close.