The Federal Reserve has once again dropped the hammer on its rate hike efforts, announcing its fourth 75 basis points increase since it began its monetary tightening earlier this year.
With inflation still at four-decade highs, Fed officials emphasized the upward pressure the Russian invasion of Ukraine has had on inflation this year and caused “tremendous human and economic hardship.”
While the Wednesday announcement is on par with pundit expectations, it comes as mortgage rates have surpassed 7% and core inflation—excluding energy and food—tallied its biggest increase since August 1982.
As such, Fed officials acknowledged the need for additional rate increases in the coming months.
“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 development,” read a statement from the Federal Open Market Committee (FOMC).
In a press conference following the Fed’s announcement, Fed Chair Jerome Powell said, “my colleagues and I are strongly committed to bringing inflation back down to our 2% goal. We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%.”
That appeared to be a common response throughout the conference as Powell fielded questions about the Fed’s aggressive approach to rising interest rates in recent months.
Powell has hinted in previous press conferences at possibly slowing the rate hikes but admitted Wednesday that there is still “significant uncertainty” around that level of interest rates hikes in the future.
“We have some ways to go, and incoming data since our last meeting suggest that the ultimate level of interest rates will be higher than previously expected,” Powell said.
Since implementing its rate hike efforts in March, the FOMC has increased rates by 3.75%, a historical feat, according to Powell.
He stated that reducing inflation would likely require a “sustained period of below trend growth” along with a softening labor market.
“The historical record cautions strongly against prematurely loosening monetary policy,” Powell said. “We will stay the course until the job is done.”
Powell also highlighted signs that the U.S. economy has slowed from last year’s rapid growth. That included the housing sector, which has “weakened significantly,” which he attributed to higher mortgage rates.
“We are seeing the impacts on demand in the most interest rate sector of the economy such as housing,” Powell said. “It will take time, however, for the full effects of monetary restraints to be realized, especially on inflation.”
With inflation still elevated and mortgage rates higher than many predictions at the start of the year, Wednesday’s rate hike didn’t surprise onlookers and real estate pundits.
Mortgage Bankers Association (MBA) Chief Economist Mike Fratantoni said in a statement that the combination of elevated mortgage rates and steep home-price growth over the past few years has dramatically reduced affordability.
“The volatility seen in mortgage rates should subside once inflation begins to slow, and the peak rate for this hiking cycle comes into view,” he said.
Despite whispers that the Fed could potentially slow the rate hikes in coming months, Fratantoni indicated that the MBA expects another 75 basis points jump before holding them steady throughout 2023.
With mortgage rates above 7%, the housing and lending sector have felt the strain as refinance activity has effectively stopped and home purchase activity has slowed.
The question likely on many people’s minds is how high mortgage rates will go, according to Bright MLS Chief Economist Dr. Lisa Sturtevant.
“In the short-term, mortgage rates may have already baked in this well-telegraphed federal funds rate hike, which means homebuyers should see rates remain around 7%,” she said.
At this point, two things could happen to mortgage rates in the near-term scenarios on rates, according to Sturtevant.
If inflation remains stubbornly higher, she suggested that the Fed maintain its aggressive rate hikes, which could send mortgage rates to 8% or higher late this year or early next year.
On the other hand, inflation could ease, leading the Fed to pull back on its rate escalation, meaning mortgage rates could stabilize, she said.
“Looking ahead, the trajectory of mortgage rates will depend largely on how effective the Federal Reserve has been on tamping down inflation,” Sturtevant said. “One thing is clear—don’t expect rates to fall any time soon.”
National Association of REALTORS® Chief Economist Dr. Lawrecne Yun echoed similar sentiments but also said once inflation is reeled in, mortgage rates will start to drift lower.
“It may be another year or two before that happens,” he said.
