Mortgage rates to stay neutral if Feds hike rates this week

Edward Anderson on December 13, 2022

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Mortgage rates: The Federal Reserve is expected to raise rates further this week, but mortgage rates are expected to remain unchanged.

Mortgage rates have had several ups and downs this year but peaked at 7% for weeks in October and November.

However, signs of slowing inflation pushed mortgage rates down.

According to a Bankrate survey (owned by Red Ventures alongside NextAdvisor), the average 30-year fixed-rate mortgage is down to 6.62%.

Expectations

JR Gondeck, financial advisory partner and managing director of Lerner Group, is optimistic about the interest rates.

“From a mortgage perspective, rates have actually gone down even though the Fed has raised rates. We would expect the worst is over,” said Gondeck.

“We think you’re going to see lower rates into the next year despite further rate hikes.”

Meanwhile, experts and financial markets expect the US Federal Reserve to raise its benchmark short-term interest rate (the federal funds rate) by 50 basis points this week.

However, experts also say the next steps for mortgage rates depend more on Fed Chairman Jerome Powell’s 2023 projection.

Odeta Kushi, the American Financial Corporation deputy chief economist, suggested it’s all about expectations.

“If the market is surprised by the Fed’s projections, we could see some movement in mortgage rates,” said Kushi.

“Whether that surprise is to the upside or the downside.”

The Fed

Housing costs are already a significant component of consumer spending.

The housing market was a critical indicator of the Fed’s continued efforts to contain inflation, standing at 7.7% year-over-year in October.

Since early 2022, the Fed has raised the federal funds rate from 0% to 3.75%, one of the central bank’s fastest rate hikes.

The hikes were an attempt to curb ongoing inflation.

Denis Poljak, the co-founder of Poljak Group Wealth Management, provided a unique perspective on inflation, saying:

“Inflation is, essentially, too much money chasing, too few foods.”

The Federal Reserve is making it harder to borrow money by raising interest rates.

Additionally, they said they will continue to increase rates until they see continued declines in consumer spending and inflation.

Housing market

The current inflationary climate did not occur overnight.

It has gained momentum since the outbreak of the 2020 pandemic, of which the real estate market is a clear example.

The pandemic boom in the housing market led to massive price hikes, with demand failing to meet supply.

The rise in house prices continued until they peaked in the middle of the year.

Since then, prices have slowly declined as high mortgage rates have curbed demand. Also, the housing market has been in neutral territory lately.

However, falling home prices and stabilizing mortgage rates may make affordability difficult, especially for first-time buyers.

The Fed & mortgage rates

Mortgage rates are not directly tied to Federal Reserve actions but are affected by inflation.

When people take out a mortgage, it is sold to investors in the bond market as part of a pool of mortgages called mortgage-backed securities.

Inflation and rising borrowing costs have prompted lenders to increase mortgage rates to give investors higher yielding mortgage-backed securities.

When inflation eased in October, mortgage rates fell, and the bond market rallied.

The housing market represents an important sector of consumer spending.

If the Fed slows housing cost growth, it will likely substantially affect the economy.

“As long as new lease inflation keeps falling, we would expect housing service inflation to keep falling sometime next year,” said Jerome Powell.

“Indeed, a decline in this inflation underlies most forecasts of declining inflation.”

The Fed’s pace

The Federal Reserve has consistently maintained rate hikes through its December meeting.

The Fed aggressively hiked rates by 75 basis points after four consecutive meetings.

“And the reality is, it’s working,” said JR Gondeck. “They started late, but they’re catching up to where things are.”

Despite the progress, the Fed must find a balance between being aggressive and going too far too fast.

The decision to raise rates by 50 basis points instead of 75 suggests the Fed is hoping for a soft landing instead of an outright recession.

“This way, Powell can continue with his agenda to slow the economy down but help create a softer landing, a more moderate recessionary environment,” says Poljak.

The Fed should observe incoming data on housing inflation for a soft landing or a moderate recession.

“The housing market is the leading indicator of a recession,” says Odeta Kushi.

“But traditionally, it has also aided the economy in recovering from one.”

Projections

The Federal Reserve will adjust interest rates and make forecasts for 2023 at its December meeting.

The latest inflation report shows a positive sign, but the Fed needs more to curb rate hikes.

Additionally, the Fed has indicated that it is cautious about easing interest rate hikes until there are indications that inflation has been around or below the Fed Funds rate for several quarters.

However, further hikes may not lead to drastic mortgage rate changes.

Indications of easing inflation should stabilize mortgage rates at lower levels.

“I think the rate hike is pretty much already priced into the market. The Fed is going to raise their short-term rate by half a percent,” said Gondeck.

“But from there, it’s going to matter more what they say about the future, and specifically, the tone they use.”

Reference:

‘The worst is over’ for mortgage rates despite another looming Fed hike, experts say

The Federal Reserve resort to smaller hikes

Leah Cooper on December 5, 2022

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The Federal Reserve recently said it may slow the pace of aggressive rate hikes sooner than expected.

The announcement came on Wednesday as Fed Chairman Jerome Powell spoke at an economic forum.

The announcement

Federal Reserve Chairman Jerome Powell delivered fiscal and monetary policy remarks at the Hutchins Center.

It was his last public appearance before the central bank entered a blackout period at its December 13-14 policy meeting.

“The time for moderating the pace of rate increases may come as soon as the December meeting,” said Powell.

“Despite some promising developments, we have a long way to go.”

The Federal Reserve chairman also noted that they had not seen any noticeable progress in the decades-high inflation dragging the economy down.

Rate increases

Meanwhile, investors are looking for signs that the Fed is slowing or halting its aggressive rate hikes.

Recently, the Federal Reserve has increased its rhetoric to spread the message that more needs to be done.

Additionally, officials will continue to raise interest rates until inflation shows signs of slowing.

This time, however, the rate increases will be lower than before.

Stock market

James Bullard, president of the St. Louis Federal Reserve, warned this week that the stock market underestimates the risk of an aggressive Fed.

Meanwhile, John Williams, president of the New York Federal Reserve, said inflation remains the foremost economic concern worldwide.

Williams called underlying inflation in the services sector the most challenging aspect of the battle.

Actions

The Fed raised interest rates six times in 2022 for the following reasons:

Discouraging borrowing
Cooling the economy
Bringing down the high inflation that peaked at 9.1% over the summer

Since then, the latest consumer price index showed a drop in inflation to 7.7%.

Employment

Despite aggressive measures, the labor landscape has proven to be sustainable.

The economy has regained the jobs lost after millions were out of work at the start of the pandemic.

In recent months, hundreds of thousands of jobs have been added to the labor market.

Moreover, the market has maintained a low unemployment rate at nearly half a century.

While workers may have good news, the labor market puts the Fed in a difficult position.

A staff shortage means employees can charge their prices, adding to inflationary pressures.

A recent Job Vacancies and Labor Turnover survey showed on Wednesday that nearly 1.7 vacancies were available to job seekers in October.

According to Powell, the decline in job postings is a positive sign.

However, he noted that although the relationship between job vacancies and unemployment is strained, he and other Fed officials believe the labor market could regain equilibrium as job vacancies decline.

“We’ve seen that so far, but it’s way too early,” said Powell.

Corrections

The Federal Reserve is tackling a supply-side inflation problem with blunt tools.

Demand for goods in the United States soared last summer as consumers emerged from days of shutdowns and layoffs.

However, the recovery of the global supply chain is taking longer, leading to bottlenecks, goods shortages, and price hikes.

The Federal Reserve has resisted calls to deal with runaway inflation, calling them “transitory.”

Moreover, the Fed kept interest rates at historically low levels because it did not want to risk a resumption of economic growth.

As demand rises, inflation has become the central bank’s primary concern.

In March, the Federal Reserve launched a rapid corrective course with the following actions:

Hiking its benchmark lending rate by a quarter of a point
Hiking lending rate by half a point
Rolling out four consecutive massive three-quarter-point hikes

However, the measures have not yet succeeded in curbing inflation in the United States.

Instead, rate hikes could possibly do more harm than good.

New approach

The Federal Reserve currently employs a new model of sustained, smaller rate hikes over an extended period.

They believe the approach will result in a soft landing that will keep inflation in check while avoiding a recession or major layoffs.

“I do continue to believe that there’s a path to a soft or softish landing,” said Jerome Powell.

“I think it’s still achievable.”

“It is likely that restoring price stability will require holding policy at a restrictive level for some time.”

“History cautions strongly against prematurely loosening policy,” he added.

“We will stay the course until the job is done.”

Reference:

Small rate hikes are likely coming in December, says Fed Chair Powell

Federal Reserve continues with another rate hike

Leah Cooper on November 7, 2022

The Federal Reserve on Wednesday approved another consecutive rate hike, one of the most recent and serious moves to fight inflation.

The hike

The Federal Reserve approved a fourth consecutive rate hike of three-quarters of a percentage point.

The hike takes the average central bank lending rate to a new range of 3.75% to 4%.

This is the highest interest rate in more than a decade since January 2008.

The Fed’s rate hike is the latest aggressive attempt to rein in the inflation plaguing the US economy.

The decision

Wednesday’s decision comes after the Federal Open Market Committee’s two-day policy meeting.

It also marks the Federal Reserve’s most challenging policy move since the 1980s.

The decision threatens to increase the economic pain for millions of US businesses and households by increasing the cost of borrowing.

It can potentially trigger a recession.

Soft landing

At a press conference after the meeting, Federal Reserve Chairman Jerome Powell acknowledged that the road to a soft landing was narrowing.

Despite the narrowing lane, he assures people that it is still possible.

Soft landings are a process to cool the economy while avoiding a recession.

“The inflation picture has become more and more challenging over the course of this year,” said Powell.

“That means we have to have policy be more restrictive, and that narrows the path to a soft landing.”

Jerome Powell reiterated his commitment to reducing inflation.

Furthermore, he asserted that continued inflation would cause more economic suffering compared to a recession.

New language

The Fed’s November statement included a new section added by officials, which came as a surprise.

The Federal Reserve generally repeats the same language on every release.

In its latest statement, the Federal Open Market Committee assumes that further increases in the target range are needed to adopt a monetary policy stance.

Monetary policy is tight in an attempt to bring inflation back to 2%.

Fed watchers might speculate that adding “over time” to their inflation target would have fewer negative consequences.

Further, it could mean the Fed would revert from aggressive rate hikes to lower rate hikes over the longer term.

The statement further stated:

“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.”

Cooling economy

The new language also paves the way for lowering interest rates, recognizing that monetary policy can cool the economy.

Despite the economic data showing strong growth, the cooling economy appears to be working.

Wall Street may also see the new language as a response to the criticism regarding the Fed over-correcting with high rate hikes that could harm the economy.

Markets

Recent data shows that mortgage rates are reaching levels not seen in 20 years and are starting to weigh on the housing market.

New home sales in September were down 10.9% from August.

They are also down 17.6% compared to 2021.

However, inflationary pressures are also easing.

Wages and salaries increased by 1.2% in the third quarter after 1.6% in the second quarter.

However, despite the changes, the labor market remained tense.

The number of vacancies increased in September to 1.9 vacancies per available employee.

Friday’s job report is expected to show the economy will add 200,000 jobs in October.

While it is lower than last month, the number remains at an all-time high.

Reference:

The Fed makes history with a fourth straight three-quarter-point rate hike

Federal Reserve hits fifth interest rate hike this year

Leah Cooper on September 26, 2022

On Wednesday, the Federal Reserve approved a third consecutive 75 basis point hike to curb inflation plaguing the US economy.

The benchmark

The rise was considered unfathomable by the markets months earlier.

However, it raised the central bank’s benchmark rate to new highs with a target range of 3% to 3.25%.

The latest increase makes it the highest official rate since the 2008 global financial crisis.

Wednesday’s decision is the Fed’s toughest policy move since the 1980 decision, which also aimed to tackle inflation.

Rising rates are likely to cause economic hardship for millions of US businesses and households by increasing the cost of home, automobile, and credit card loans.

Economic pain

Jerome Powell, the chairman of the Federal Reserve, acknowledged the economic pain the rapidly tightening regime could cause.

A press conference was held on Wednesday afternoon following the announcement of the central bank’s monetary policy following a two-day monetary policy meeting.

“No one knows whether this process will lead to a recession or, if so, how significant that recession would be,” said Powell.

The Fed also released an updated summary of its economic plans, reflecting the pain.

Growth prospects

The quarterly report showed a less optimistic outlook for economic growth and the labor market.

The median unemployment rate rose to 4.4% through 2023, higher than the 3.9% originally forecast by Fed officials in June.

It is also well above the current rate (3.7%).

The main measure of economic output in the United States, GDP, was revised down from 1.7% to 0.2% in June.

The numbers are lower than analysts’ estimates, as Bank of America economists initially expected GDP to be revised down to 0.7%.

Inflation forecasts

Meanwhile, inflation expectations have also increased.

The Fed’s SEP showed that main personal consumption expenditure is expected to reach 4.5% this year and 3.1% next year.

The figures are higher than the June forecast of 4.3% and 2.7% respectively.

The Fed Funds Rate Projection is the most important element for investors looking for a Fed forecast.

It outlines what officials say is the right political path for future rate hikes.

Figures released Wednesday show the Federal Reserve expects interest rates to remain high for years.

The median projection for the federal funds rate was also revised from 3.4% to 4.4% in June.

This number is expected to rise from 3.8% to 4.6% next year.

The interest rate forecast has also been revised from 3.4% to 3.9% for June 2024 and is expected to remain high at 2.9% in 2025.

Overall, the new projections show a growing risk of a hard landing – monetary policy should tighten ahead of a possible recession.

Projections also show that the Fed is willing to bear certain difficulties in economic conditions in order to reduce ongoing inflation.

According to Moody’s Analytics, higher prices would mean consumers spent about $460 per month on groceries last year.

However, the labor market and consumer spending are strong areas.

In many places, it appears that real estate prices are still high despite high mortgage rates.

The government may believe the economy can continue to support aggressive rate hikes.

Reference:

Fed goes big again with third-straight three-quarter-point rate hike