Continuing to raise short-term rates, the Fed maintains a course on mortgages and other news

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Peter Kavinsky

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Mortgage markets appear to have already priced in their fourth sharp increase in short-term interest rates this year as the Federal Reserve continues what has proved to be a difficult fight against inflation.

Despite the Fed’s aggressive announcement of Wednesday’s 75 basis point hike in the federal funds rate to 3.25 percent, mortgage rates, which have recently risen to levels not seen since 2008, may be poised for a breather.

Yields on 10-year Treasury bonds, considered the barometer of mortgage rates, slipped after Wednesday’s meeting, when Federal Reserve Chairman Jerome Powell analyzed the Fed’s thinking.

Russia’s war against Ukraine has driven up energy and food prices and created additional upward pressure on inflation, Powell said at a news conference following a two-day meeting of the Federal Open Market Committee.

While the Fed is likely to continue its current aggressive short-term rate hike strategy, Powell reassured bond market investors that the central bank is not looking to further accelerate the pace of Treasury and mortgage debt removal.

In addition to expecting additional short-term rate hikes “would be worthwhile,” Fed policymakers have said they will continue to shrink the central bank’s balance sheet by nearly $9 trillion, getting rid of $60 billion in Treasury bonds and $35 billion in mortgage debt each month.

But Powell said that for now, the Fed is content to shrink its balance sheet by simply allowing delinquent assets to be written off rather than being replaced. Fed policymakers have said in the past that they would also consider selling Treasuries and mortgage debt if necessary to speed up “quantitative tightening,” which would put more upward pressure on mortgage rates.

“We said we’d look into it as soon as the balance sheet got under way,” Powell said. “It’s not something we’re looking at right now, and it’s not something I expect to be looking at in the near future. This is what we will address, but the time for addressing this is not yet close.

With one measure of inflation, personal consumption spending projected at 5.4% this year and not expected to return to the Fed’s 2% target until 2025, Powell said Fed policymakers see no reason to be complacency in raising short-term rates.

“The longer the current bout of high inflation continues, the greater the chance that higher inflation expectations will take hold,” he warned. “We are guided by ensuring maximum employment and stable prices for the American people.”

Mike Fratantoni

Fed policymakers’ economic projections “indicate slower growth, a slow slowdown in inflation, and a federal funds rate likely to exceed 4 percent,” Mortgage Bankers Association chief economist Mike Fratantoni said in a statement. “The surprise for the market could be the average expectation that they can increase [short-term] to 4.4% by the end of this year.”

While some economists and bond market investors are betting that the Fed will have to slow rate hikes if growth halts, and possibly reverse them if the economy goes into recession, Powell seemed intent on cutting off such speculation. .

“So far, there is only modest evidence that the labor market is cooling,” he said. “There are fewer vacancies. Exits from their all-time highs. There are signs that wages may be flattening. Wage growth has declined, but not by much.”

Historically, the Fed has raised the federal funds rate by 25 basis points at a time when it wanted to slow economic growth. A basis point is one hundredth of a percentage point, so it usually takes four increases of 25 basis points to raise the federal funds rate by 1 percentage point.

Here’s how the Fed started the year by raising short-term rates by 25 basis points on March 17th. When that didn’t work, the Fed made a 50 basis point hike on May 5.

As inflation continues to defy expectations, the Fed has made three increases of 75 basis points at its last three meetings, June 16, July 28 and September 21.

Overall, the Fed has raised short-term rates by 3 percentage points this year and shows no signs of slowing down.

Before making small hikes, let alone halting rate hikes, the Fed would like to see “growth continue to lag the trend to see labor market movements indicating a return to a better balance between supply and demand, and clear evidence that inflation is returning to 2 percent.”

“In regards to rate cuts, we would like to be very confident that inflation comes back down to 2 percent before we consider it.”

In a note to clients, Ian Shepherdson, chief economist at Pantheon Macroeconomics, expressed surprise that the Federal Open Market Committee’s policy statement contained “no mention of a startling collapse in the housing market.”

Shepherdson said he now expects the Fed to pass another 75 basis point hike in the federal funds rate in November, but return to the more traditional 25 basis points in December.

“By November, the Fed will have another round of inflation data, and three more by December, and we expect all of them to be much better than they were in August,” Shepherdson said.

In their latest forecast Wednesday, Fannie Mae economists said they no longer expect mortgage rates to fall below 5 percent next year.

Mortgage rate cuts no longer predicted

Source: Fannie Mae Housing Forecast, September 2022

In August, Fannie Mae forecast that 30-year fixed-rate mortgage rates would peak at 5.2 percent this year and fall to 4.4 percent in the second half of 2023. 5.5 percent by the last three months of next year.

Economists at the Mortgage Bankers Association, in their September 19 forecast, predicted rates would peak at 5.5% in the second half of 2022 before dropping back to 5.0% by the end of next year.

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Peter Kavinsky

Peter Kavinsky is the Executive Editor at

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