As per expectation, federal Reserve It slowed rate hikes in 2023 amid cool inflation data that raised hopes of a recovery in the housing market this year.
Thank you for reading this post, don't forget to subscribe!Federal Open Market Committee (FOMC) on Wednesday afternoon decided to raise the federal funds rate by 25 basis points to a range of 4.50%-4.75%.
The decision follows four subsequent 75 basis point increases in June, July, September and November and a 50 basis point increase in December.
The Fed begins raising rates in March 2022 to bring inflation back to its 2% target. Prices had increased significantly based on supply-demand imbalances related to the Covid-19 pandemic and Russia’s war against Ukraine.
However, the consumer price index (CPI) rose 6.5% in December compared to a year ago. Bureau of Labor Statistics , The latest sign that inflation is cooling off. This is the smallest 12-month increase in the index since the year ending October 2021.
According to the FOMC, recent indicators point to a modest increase in spending and output, strong job gains in recent months, a low unemployment rate and higher inflation. Meanwhile, Russia’s war against Ukraine is causing economic hardship and increasing global uncertainty.
“The committee estimates that ongoing increases in the target range would be appropriate to achieve a monetary policy stance that is restrictive enough to bring inflation back to 2% over time,” the FOMC said in a statement.
The FOMC said it would continue to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.
No Basis for Complacency With Inflation
Fed Chairman Jerome Powell told reporters Wednesday afternoon that the US economy slowed significantly last year – and expects growth to continue in 2023 at a “significantly weaker” level.
Powell noted that while recent developments regarding inflation are encouraging, this is not a basis for complacency. According to Powell, Fed officials “need significantly more evidence to be sure that inflation is on a sustained downward trend”.
In particular, the housing services sector needs attention, as its prices will continue to rise for some time. According to Powell, the expectation is that it will decline due to fewer new leases.
“The slow pace of shifting (rate hikes) will help the committee assess the economy’s progress toward our goals, as we determine the extent of growth needed to achieve a sufficiently restrictive stance in the future,” Powell said. We do.”
Regarding the Fed’s next steps, Powell said it was difficult to manage the risk of doing too little and finding out six or 12 months later that they were close but had not worked to bring inflation down to the 2% target. Meanwhile, Powell said the Fed has no incentive or desire to move further.
Despite several questions on the subject, Powell did not indicate when a possible pause in rate hikes might occur. He also said that given the current scenario, he does not expect the committee to cut rates this year. The committee will release its updated economic projections in its next meeting, which is scheduled for March 21 and 22.
impact on the housing market
Mortgage rates have recently declined after reaching the 7% mark in October 2022, with the Fed reducing its rate hike. HousingWire’s Mortgage Rates CenterThe optimum blue Data showed the 30-year fixed rate stood at 6.16% on Tuesday, down four basis points from two weeks ago.
But monetary policy watchers are already trying to figure out and understand the Fed’s next move — and the potential effects on the housing market.
According to Doug Duncan, Senior Vice President and Chief Economist fannie maeThe Fed is going to keep fed funds or faster rates high until they are confident that they have driven out inflation.
“But we think rates will come down — mainly because of the recession,” Duncan said in an interview with HousingWire.
Last April, Duncan and his team at Fannie Mae added an expectation to their forecasts of a recession in the first quarter of 2023 due to Fed moves. And, their latest forecast ultimately included a 0.6% decline in GDP for the year, as a soft landing seems plausible, according to the team.
For the housing market, declining rates mean that growth in home prices will be slow.
“Those things will improve affordability, allowing housing to take off because demand is still very strong relative to supply,” Duncan said.
According to Fannie’s latest forecast, however, mortgage rates will still be at 6.1% at the end of 2023. However, Duncan said rates could go as low as 5%.
to George Ratiu, realtor.com senior economist, The Fed is set to raise the funds rate more this year to bring inflation closer to the 2% target.
“For buyers and sellers, this indicates further adjustments in average prices in the coming months,” Ratiu said in a statement.
Nick Shah, CEO home.llc., predicts the Fed will raise rates by 25 basis points at its March meeting. When rates reach 4.75%-5%, there can be three scenarios.
“If the Fed hikes rates beyond 5%, we will see an equity correction and a recovery in the housing market. If the Fed holds off on raising rates to 5%, the 30-year mortgage will continue to fall to around 5.80% – House prices will bottom out and slowly start to climb again. If the Fed pivots and starts dropping rates, mortgage rates will drop even faster, and we’ll see house prices go up year over year. Will end 2023 with a growth of 4%,” said Shah.
