The Federal Reserve on Wednesday raised its benchmark interest rate for the seventh time this year, and said it’s not yet done with rate hikes as it works to rein in inflation.
However, housing industry experts — with one exception — said continuing Fed rate hikes would not alter their projections of less volatility in mortgage rates next year.
As expected by analysts, the Federal Open Market Committee (FOMC) ended its final two-day meeting of the year on Wednesday by announcing a 50-basis-point increase. That followed four consecutive increases of 75 basis points.
With the rate starting the year at zero, it has now increased 425 basis points. It is now at its highest point since late 2007, but the committee isn’t done with raising the rate.
Following the meeting, Powell said during a news conference that “ongoing increases will be appropriate,” and that the Fed also would continue “the process of reducing our balance sheet.”
He added, "We have a long way to go to get to price stability."
Wednesday’s 50-basis-point increase sets the target range for the federal funds rate at between 4.25% and 4.5%. In its Summary of Economic Projections (SEP), however, the FOMC raised its projection for the rate to peak at 5.1% next year, a half-percentage point higher than the projection following its meeting in September. Powell said 17 of the 19 FOMC participants agreed with the 5.1% peak.
A 5.1% peak for the rate means the Fed would impose additional increases next year totaling 85 basis points.
The SEP also set the target range for the rate in 2023 at between 5.1% and 5.4%, also a half-percentage point higher than the range the committee projected in September.
Done 'Playing Catch-Up'
Realtor.com Chief Economist Danielle Hale said the Fed’s decision to raise the peak rate was expected.
“This continues the trend of upward revisions in policy expectations throughout this cycle, as inflation has been far more persistent than was initially expected,” Hale said, “but with the two recent Consumer Price Index readings showing that inflation may have crested, this may be the last time that Fed forecasters are playing catch-up to higher inflation."
“Consistent with these projections,” she added, ”the (FOMC) statement language continued to note that ongoing increases ‘will be appropriate,’ even as the size of today’s hike was smaller.”
Hale noted that economic activity has so far remained relatively resilient. “Since the last Fed meeting in early November, U.S. companies have added over half a million employees to payrolls (547,000), helping to keep the unemployment rate at 3.7%, just above the rate that prevailed immediately before the pandemic and below the Fed’s September expectations,” she said. “After faltering in the first half of the year, the economy grew at a pace of 2.9% in the third quarter. But not all sectors of the economy are faring well. The interest rate-sensitive housing sector has struggled, with a slowdown seen in construction and new and existing home sales as the cost of buying a home at today’s prices and mortgage rates has soared.”
While the federal funds rate does not directly affect mortgage rates, those rates have also risen dramatically this year before falling back somewhat in November. Hale noted that mortgage rates are down 0.75 percentage points from their early November peak, restoring some homebuyer purchasing power.
“But context is important,” she said. “The prevailing 30-year fixed-rate mortgage remains more than double its year ago level. Moreover, the volatility in mortgage rates, which has been three times what’s typical in 2022 as investors try to anticipate what’s ahead, has meant that shoppers have to visit and revisit their budgets to ensure they’re set appropriately.”
As a result, Realtor.com’s 2023 housing forecast and economic outlook expects higher rates to stick around until inflation makes greater strides toward the Fed’s 2% target rate, Hale said. “But in a welcomed change of pace, we expect lower volatility in mortgage rates in the year ahead.”
Near 'The Peak Rate'
Mike Fratantoni, senior vice president and chief economist for the Mortgage Bankers Association, suggested that, if recent trends continue “with respect to consistent declines in inflation amidst an increasing risk of recession, we may be near the peak rate for this cycle, now expected to be just over 5%.”
He said the MBA still forecasts a recession in the first half of 2023, as the full impact of the rate increases is absorbed by the economy.
As for the housing market, Fratantoni said it has welcomed the recent decline in mortgage rates, which reflect “market expectations of being near the peak for short-term rates, as well as increased signs that the U.S. is headed for a recession next year.”
“Weaker growth typically leads to lower long-term interest rates,” he continued, “including mortgage rates. MBA is forecasting that mortgage rates for 30-year fixed-rate loans, which were at 6.4% last week, are expected to drift down and end 2023 around 5.2%.”
Texas Residential Mortgage Lending Attorney Marty Green, however, questions whether mortgage rates will continue to fall in 2023.
Overly Optimistic?
“The question is,” said Green, a principal with the law firm Polunsky Beitel Green, “whether the market is just being overly optimistic or whether the market actually has a better reading on inflation and the possible effects of a recession than the Federal Reserve does.”
He noted that, while there has been some recent improvement in the mortgage market — a combination of home-price reductions, increased inventory, and an improved interest rate environment — market activity remains far below its pace earlier in 2023 as declining home affordability, the transition of the residential real estate market, and fears of a recession “continue to significantly dampen demand for housing.”
“The mortgage market is taking the Federal Reserve’s latest move as a clear indication that the pace of interest rate increases will be moderated going forward,” Green said. “and are hopeful that any increases in 2023 will be in the more typical 25-basis-point increments.”
Powell, the Fed chairman, said the question is not how high the federal funds rate will go, but rather how long the Fed decides to keep it high.
“Until we’re really confident that inflation will come down for some time, we may have to raise rates higher to get where we want to go,” he said, adding, “I wouldn’t see us considering rate cuts until we are confident that inflation is moving down to our 2% goal.”
