Fannie Mae Expects Growth To Slow As The Fed Wrangles Inflation – NMP Skip to main content

Fannie Mae Expects Growth To Slow As The Fed Wrangles Inflation

Feb 18, 2022
Fannie Mae HQ

Its Economic & Strategic Research Group says rising mortgage rates and even higher home prices will limit affordability.

KEY TAKEAWAYS
  • ESR Group says it expects The Fed to implement a 50-basis-point increase to the federal funds rate in March as the first in a series of interest rate hikes through 2023.

The Fannie Mae Economic & Strategic Research Group (ESR) has downgraded its expectations for economic growth in 2022, citing the more aggressive action it expects to be taken by the Federal Reserve to try to tame inflation.

In commentary released Thursday, the ESR Group said that with inflation at its highest level in four decades, the Fed is expected to enact a more aggressive course of monetary-policy tightening than previously forecast. It said it now expects the Fed to implement a 50-basis-point increase to the federal funds rate in March as the first in a series of interest rate hikes through 2023.

The combination of a less accommodative interest rate environment and an increasingly worker-scarce labor market led the ESR Group to downgrade its expectations for growth in real gross domestic product (GDP) to 2.8% from 3.1%. 

However, the group said its expectations for 2023 headline growth remain unchanged at 2.2%, “a pace that approaches the long-run trend.”

“Risks to the forecast include uncertainty over the future course of inflation, potential geopolitical developments in Eastern Europe, and currently unforeseen COVID-related disruptions to consumer behavior and the labor market,” the group said.

In addition to a slowdown in economic activity, the ESR Group said it expects housing activity to moderate from 2021’s highs. It said single-family home sales are expected to decline 2.4% in 2022 — a slightly steeper drop than its previously anticipated 1.2% dip — due to increasing affordability constraints associated with rising mortgage rates. 

The ESR Group said it projects home-price growth, as measured by the FHFA Purchase-Only Index, at 7.6% in 2022 and 3.3% in 2023, down from last year’s record-setting 17.3%. 

The group also said that with the 30-year fixed-rate mortgage now projected to close the year at 3.7%, refinance activity, as a share of total single-family mortgage originations, is expected to decline to 36% in this year, down from 58% in 2021, and could move even lower if rates move further upward.

“Challenges to macroeconomic forecasting have grown not only because of inflation’s largely unexpected persistence, but also because of its outsized and broad-based impact on the U.S. economy and global economic growth,” said Doug Duncan, Fannie Mae senior vice president and chief economist.

“Headline inflation will likely decline from year-ago levels as price pressures ease, but upward price pressures are not expected to be as fleeting as initially thought — and it’s likely that the period of time required for inflation to be reversed has been extended significantly,” Duncan said. “Compared to a few months ago, financial markets now expect a substantially more aggressive monetary posture from the nation’s central bank, which is likely to result in heightened volatility as the Fed retains the optionality necessary to engineer a non-inflationary soft landing.”

He said that the ESR Group currently forecasts “the Consumer Price Index closing 2022 and 2023 at 4.4% and 2.5%, respectively, down from a peak of 7.6% in the current quarter. If correct, inflation will still be above the Fed’s 2-percent target at the end of next year, despite our expectation of more aggressive Fed action.”

Duncan added that, “For homebuyers, we believe that borrowing costs will likely rise with the increase in mortgage rates, further eroding affordability. At the same time, we expect demographic factors and a shortage of housing supply to be supportive of housing activity. What remains unknown is how higher mortgage rates and tighter monetary policy — through expected interest rate hikes and changes to the makeup of the Fed’s portfolio — will impact home prices.

About the author
David Krechevsky was an editor at NMP.
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