Control inflation with a historic rate hike
The Federal Reserve’s fight against inflation has resulted in its largest rate hike in 22 years.
The ongoing Russian invasion of Ukraine, China’s Covid lockdowns and supply chain issues are keeping upward pressure on inflation and the central bank is again taking action to offset it.
The Fed raised the target federal funds rate at its May meeting and plans to raise it further after each of the five remaining FOMC meetings this year.
Any borrower looking to refinance or buy a home should act quickly before interest rates likely rise through 2022.
The role of the Fed and the last FOMC meeting
The Federal Reserve does not actually set mortgage interest rates. On the contrary, the movement of mortgage rates is closely correlated to the policy actions of the Fed.
Due to decades-long high inflation and pandemic-related supply imbalances, the central bank is further tightening policies.
It announced at its May 4 FOMC meeting a 50 basis point (0.5%) increase in the target range for its federal funds rate – the biggest expansion since 2000. The jump came as no surprise, as Fed Reserve Chairman Jerome Powell previously said in April that, “Additional 50 basis point increases should be on the table in future meetings.”
The Fed will also continue its plan to reduce its balance sheet. It will deposit $30 billion in Treasury holdings and $17.5 billion in mortgage-backed securities (MBS) each month from June to August, then double those amounts from September.
” The message is clear ; getting inflation under control is imperative, and the Fed will act aggressively to achieve that,” said Odeta Kushi, America’s first deputy chief economist. “Whether or not the housing market is ‘quantitatively uncomfortable’ allowing $35 billion worth of MBS to roll off the balance sheet each month will depend on demand for MBS, which will dictate whether mortgage rates rise much further.”
Mortgage rate growth may slow, for now
The FOMC reiterated its need to take a tough stance with its monetary policy. As inflation, employment and household spending all remain elevated, he felt an aggressive hike and selloff in MBS was appropriate.
Although Fed rate hikes normally precede growth in mortgage interest rates, credit markets may have already explained May’s rise.
These measures indicate economic expansion and combat high inflation. They’ve also been telegraphed in previous meetings, so they’re coming as planned. Although Fed rate hikes normally precede mortgage rate growth, credit markets may have already explained the May hike.
“MBA expects mortgage rates to plateau near current levels,” said Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association. “Financial markets have been trying to gauge the impact of Fed actions this cycle, and they’re likely pricing in the resulting economic slowdown as well.”
While this Fed move may have already been priced in by lenders, similar hikes are expected for each of the remaining FOMC meetings in 2022 — hikes not yet priced into the market.
What this means for borrowers
Rapidly rising interest rates have so far defined lending for 2022, which may actually help balance the extreme seller’s housing market.
While the MBA predicts a lukewarm move in interest rates following the latest FOMC news, that could be short-lived.
The FOMC is meeting five more times this year and bulls are expected to follow each one. The next committee meeting falls on June 14-15, so if you’re looking to buy or refinance, hurry.
Bottom line: The most likely outcome is that interest rates may never be lower than they are now.
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