Fed Rate Hike Coming in March

2022-01-26T15:19:59-06:00

At the conclusion of its January policy meeting, the Federal Open Market Committee strongly signaled that it will undertake its first, post-covid increase of the federal funds rate in March. The Fed is tightening monetary policy in response to the highest inflation readings in nearly 40 years. These inflationary pressures have increased both consumer costs and businesses input costs, including those faced by the residential construction sector. Today’s policy announcement noted clearly: With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. Housing market stakeholders should be prepared for four 25 basis point federal funds rate increases over the course of 2022. It is possible that the first rate hike could be larger than 25 basis points, given the current overshoot of inflation. However, while possible, this seems less likely than not given the more preferred, orderly approach the Fed has been telegraphing for moving from accommodative monetary policy to tighter, anti-inflationary policy. Additionally, the Fed will reverse course from quantitative easing to balance sheet reduction. The Fed’s announcement today indicates that bond purchases, including mortgage-backed securities, will end in March. Balance sheet reduction should begin after the first rate hike, perhaps late Summer or early Fall. How large this balance sheet reduction will be is uncertain. The Fed currently holds approximately $9 trillion in financial assets, the previous purchase of which has held long-term interest rates lower than they otherwise would have been. It is important to note that there is not a direct connection between federal fund rate hikes and changes in long-term interest rates. Indeed, during the last tightening cycle, the federal funds target rate increased from November 2015 (with a top rate of just 0.25%) to November 2018 (2.5%), a 225 basis point expansion. However, during this time mortgage interest rates increased by a proportionately smaller amount, rising from approximately 3.9% to just under 4.9%. Nonetheless, the ongoing policy pivot will yield successively higher interest rates in 2022 due to tighter monetary policy. This change will reduce housing affordability and again emphasizes the need for policymakers to enact solutions to fix the nation’s supply-chains. With respect to this item, a contrarian take on monetary policy would point out that higher interest rates will not solve ongoing production and logistical challenges for supply-chains. In fact, higher rates could make them worse and continue to yield higher costs for the economy. Thus, monetary policy is not the only way to fight inflation. Related ‹ New Home Sales Increase in DecemberTags: economics, FOMC, home building, housing

Fed Rate Hike Coming in March2022-01-26T15:19:59-06:00

Federal Reserve Outlook: Housing Considerations

2021-12-15T18:20:20-06:00

By Robert Dietz on December 15, 2021 • At the conclusion of its December policy meeting, the Federal Reserve announced changes to its outlook and projections that move monetary policy further away from the accommodative stance that has supported the economic rebound from the 2020 recession. This pivot toward tighter policy is a direct result of ongoing, elevated inflation data. Today’s announcement makes several changes to both the Fed’s economic outlook and its implied monetary policy path: Acceleration of tapering of purchases of mortgage-backed securities and Treasuries The central bank will double the pace of tapering with an anticipated conclusion of bond purchases in March 2022 Retirement of “transitory” inflation expectations The Fed’s outlook notes that supply-demand imbalances are contributing to “elevated levels of inflation” The Fed’s economic projections increased its estimate for 2021 inflation (under the core PCE measure) from 3.7% to 4.4% As an indication that inflation will persist well into 2022, the projection for inflation next year increased from 2.3% to 2.7% Higher interest rates sooner The Fed did not announce a change in the federal funds target rate today However, today’s announcement/outlook suggests three 25 basis point rate hikes in 2022 and three more in 2023 This implied tightening is consistent with our existing forecast of a 2% 10-year Treasury rate near the end of 2022. This higher rate also implies the 30-year mortgage rate rising to somewhat higher than 3.6% by the end of next year. It is important to note that there is not a direct connection between federal fund rate hikes and changes in long-term interest rates. Indeed, during the last tightening cycle, the federal funds target rate increased from November 2015 (with a top rate of just 0.25%) to November 2018 (2.5%), a 225 basis point expansion. However, during this time mortgage interest rates increased by a proportionately smaller amount, rising from approximately 3.9% to just under 4.9%. Nonetheless, today’s policy pivot, in response to increased inflation data and inflation expectations, will yield higher interest rates in 2022 due to tighter monetary policy. This change will reduce housing affordability and again emphasizes the need for policymakers to enact solutions to fix the nation’s supply-chains. asdas Related ‹ Paint, Steel, and Services Prices Set Records, Drive PPI for Residential Construction Inputs HigherTags: economics, FOMC, home building, housing, interest rates

Federal Reserve Outlook: Housing Considerations2021-12-15T18:20:20-06:00

Federal Reserve: Taper Begins

2021-11-03T14:27:11-05:00

The Federal Reserve has supported the housing market during the virus crisis, the 2020 recession, and the subsequent, ongoing recovery via asset-backed purchases (among other tools), including $40 billion a month of mortgage-backed security (MBS) purchases. These MBS purchases have held interest rates lower than they otherwise would have been. Beginning in November, the Fed will reduce the monthly volume of such purchases by $5 billion a month. Further, the Fed will reduce by $10 billion a month its purchases of Treasuries (currently at $80 billion a month). These actions will put some upward pressure on interest rates, which NAHB forecasts will reach 4% for the 30-year fixed rate mortgage during 2023. The Fed may adjust this pace of tapering as economic conditions warrant. However, if this pattern were to hold, then asset purchases will cease by mid-2022. The Fed has telegraphed these actions over the last few quarters in order to avoid a quick jump in interest rates, as happened in 2013 during the so-called “taper tantrum.” The Fed also held its target for the federal funds rate steady. When the first rate hike occurs is a matter of speculation at this stage, although today’s announced schedule of tapering suggests an initial rate increase during the second half of 2022 (perhaps after the 2022 election?). On net, this leaves the Fed in a broadly accommodative policy stance, supporting the economy. The Fed adjusted, slightly, its inflation outlook. In its statement, the Fed noted: “Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.” The “expected to be” in the statement may be a hedge to the possibility that despite a majority of economic forecasts envision the growth rate of inflation cooling during 2022, some persistent, elevated inflation may last into 2023 due to the impacts of stimulus and ongoing supply-chain challenges. The inflation outlook is being driven by opposing short-run and long-run forces. In the short-run, supply-chain bottlenecks and pressure from a reopening of the economy is increasing inflation. However, long-run factors favor lower inflation, due to demographics (an aging population), global trade, and technology.  Moreover, growth expectations have cooled recently. The winner of these countervailing inflation trends will determine the future of mortgage interest rates, which is critical given the more than 30% gain in home prices since January 2020 and declines for housing affordability. Related ‹ Home Prices Starting to Discourage a Segment of Home BuyersTags: economics, Federal Reserve, FOMC, home building, housing

Federal Reserve: Taper Begins2021-11-03T14:27:11-05:00

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