Downshift for the Fed


By Robert Dietz on December 14, 2022 • Downshifting its pace of tightening of monetary policy, the Federal Reserve’s monetary policy committee raised the federal funds target rate by 50 basis points, increasing that target to an upper bound of 4.5%. This marked a relatively smaller increase after four previous 75 basis point hikes. The Fed has clearly communicated it will continue to tighten monetary policy however, raising rates into the first quarter of next year. In fact, the Fed’s projections indicate it will likely raise by another 50 to 75 basis points at its next two meetings. Due to recent long-term rate declines, it appears markets have not priced in this future tightening. Moreover, today’s outlook from the Fed takes rates 50 basis points higher than their previous projections from September. What does this mean for housing? The Fed is likely to continue to raise rates, moving mortgage rates higher than they are today. However, the end of the rate tightening cycle appears now to be in view. That said, the Fed will maintain these newly set elevated rates for the remainder of 2023. This means that the Fed will not ease policy any time soon. The Fed’s projections suggest rate cuts will not begin until 2024. And while the Fed will likely cut by about 100 basis points in 2024, per its own current projections, the central bank will maintain rates above its estimated neutral rate (2.5%) well into 2025. The Fed recognizes that these higher rates will inflict additional economic pain. Indeed, the central bank increased its forecast for the unemployment rate. They now see that rate increasing to average 4.6% rate n 2023, up from 4.4% per their September forecast. This is lower than the NAHB forecast, which calls for an average 5.1% rate for 2023. The outlook for the start of 2023 is choppy, with measurable economic weakness and job losses. And while mortgage rates have retreated in recent weeks due to recession concerns, they are likely to see another up cycle as markets digest the new Fed policy outlook. However, today’s report at least indicates that the Fed is slowing its pace of tightening and with an end in the coming months. Related ‹ Mortgage Activity Increases as Rates FallTags: economics, FOMC, home building, housing, monetary policy

Downshift for the Fed2022-12-14T16:26:00-06:00

Inflation Continues to Cool in November


Consumer prices in November saw the smallest year-over-year gain since December 2021.While still elevated, inflation experienced the second month below an 8% annual growth rate since February 2022. However, the shelter index continued to rise at an accelerated pace and was more than offsetting decreases in energy indexes. Shelter inflation will primarily be cooled in the future via additional housing supply. As inflation appears to have peaked and continues to slow, this may ease some of pressure on the Fed to maintain a more aggressive monetary policy. The Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) rose by 0.1% in November on a seasonally adjusted basis, following an increase of 0.4% in October. The price index for a broad set of energy sources fell by 1.6% in November as the gasoline index (-2.0%), the natural gas index (-3.5%) and the electricity index (-0.2%) all declined. Excluding the volatile food and energy components, the “core” CPI increased by 0.2% in November, following an increase of 0.3% in October. This is the smallest monthly increase since August 2021. Meanwhile, the food index increased by 0.5% in November with the food at home index also rising 0.5%. Most component indexes continued to increase in October. The indexes for shelter (+0.6%), communication (+1.0%), recreation (+0.5%), motor vehicle insurance (+0.9%), education (+0.3%) as well as personal care (+0.7%) showed sizeable monthly increases in November. Meanwhile, the indexes for used cars and trucks (-2.9%), medical care (-0.5%) and airline fares (-3.0%) declined in November. The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.6% in November, following an increase of 0.8% in October. The indexes for owners’ equivalent rent (OER) increased by 0.7% and rent of primary residence (RPR) increased by 0.8% over the month. Monthly increases in OER have averaged 0.7% over the last three months. More cost increases are coming from this category, which will maintain pressure on inflationary forces in the months ahead. These higher costs are driven by lack of supply and higher development costs. Higher interest rates will not slow these costs, which means the Fed’s tools are limited in addressing shelter inflation. During the past twelve months, on a not seasonally adjusted basis, the CPI rose by 7.1% in November, following an 7.7% increase in October. The “core” CPI increased by 6.0% over the past twelve months, following a 6.3% increase in October. The food index rose by 10.6% and the energy index climbed by 13.1% over the past twelve months. NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than overall inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster (slower) than overall inflation, the real rent index rises (declines). The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components). The Real Rent Index rose by 0.6% in November. Over the first eleven months of 2022, the monthly change of the Real Rent Index increased by 0.2%, on average. Related ‹ Households’ Real Estate Asset Growth Continues to Slow in Q3Tags: cpi, inflation, monetary policy, shelter

Inflation Continues to Cool in November2022-12-13T09:16:30-06:00

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