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Amid remarkably strong U.S. economic performance and continued inflation, the Fed on Wednesday raised the federal funds rate by 75 basis points to 3.75 to 4 percent, the highest level since December 2007.
The decision, widely anticipated by Fed experts and financial markets, is intended to further slow the housing market.
The Fed’s monetary policy tightening, which began in March, resulted in cumulative increases of 375 bps, 25 bps in March, 50 bps in May, and 75 bps for the fourth consecutive time in June, July, September, and November.
The Federal Reserve continues to raise interest rates to curb high inflation, according to an Oct. 13 report from the Bureau of Labor Statistics. Inflation was 8.2% over the past 12 months, falling 0.4% in September and rising 0.1% in August.
Increases in housing, food, and health indicators contributed the most to seasonally adjusted monthly growth in all categories. According to the BLS, childcare costs rose 0.7% per month and 6.6% over 12 months.
The Fed also looks at overall US economic performance. GDP rose 2.6% in the third quarter, breaking the negative GDP trajectory from the previous quarter.
The impact on the real estate market
The Fed’s monetary policy has had a significant impact on the housing market in recent months, driving mortgage rates down to 7% and driving home sales down a downward curve.
“Consumers looking to buy a home in the mortgage market can hold onto their down payment until interest rates and/or home prices drop soon,” said Michele Raneri,” said TransUnion’s Vice President of Financial Services Research and Consulting.
In addition to raising interest rates, the Fed’s actions could also affect the real estate sector through the mortgage-backed securities market.
“The Fed knows the housing market is in a downturn and high mortgage rates are hurting the industry,” said Logan Motashami, president of HousingWire. analyst.
Further rise is expected
Another increase in the federal funds rate is expected this year. The Fed’s next meeting is scheduled for December 10. 13 and 14 – And economists began to discuss what came next.
“The Fed is in a position to figure out what to do next,” Mohtashami said. “They want unemployment down and they want to see weak economic data, so they should start talking about slowing interest rates.”
“Then the labor market will still be positive for them, which will mislead their forecasts of job losses next year.”
Mohtashami said the Fed should take a position on where it wants to go with raising interest rates and how strongly it wants the US dollar to strengthen.
“Do they want a soft landing with less economic pain, or do they want to make the economy worse in the fight to eliminate inflation?” he said
Former Fed Vice Chairman Roger Ferguson believes the Fed will continue to tighten policy over the next three meetings, including a 50bp hike in December and two 25bp hikes earlier in the year. year. In early 2023.
“I think I’m wrong because I underestimated the rate hike,” he said at the annual meeting of the Mortgage Bankers Association (MBA) in Nashville.
“Prices can stay (at the peak) much longer than people want. But in the end, I hope there will be a short and shallow recession.”
According to Bright MLS Chief Economist Lisa Sturtevant, there are two main short-term scenarios. First, if inflation remains very high, mortgage rates could rise above 8% by late 2022 and early 2023.
There is also the potential for lower inflation, which could stabilize mortgage rates but remain above 6% in the first half of 2023.
“If Fed Chair Powell remains transparent, investors can benefit from the Fed changing its behavior,” Sturtevant said.
The problem is that inflation never gets above 8%.
“Then people say, ‘Hey, we’ve been with you and we’re willing to take the pain to avoid it later, but the pain we’re in now isn’t going to ease the pain later,'” Sturtevant said.
Reference Source: Housing Wire
