In its ongoing effort to check inflation, the Federal Reserve enacted yet another increase to its key interest rate, marking the 11th such hike in a span of 17 months. Though potentially instrumental in curtailing inflation, this latest increase also teeters on the brink of pushing the economy into a recession.
The Fed's benchmark short-term rate now stands at 5.3%, a level unseen since 2001. This is likely to drive up the cost of mortgages, auto loans, credit cards, and business loans as the aftereffect of the Fed's previous rate increases.
“While the market for new home sales has recovered considerably over the past few months, the pace of overall housing market activity remains quite slow,” MBA SVP and Chief Economist Mike Fratantoni said. “Although the lack of inventory remains a constraint, housing affordability challenges continue to delay many potential buyers from entering the market. We do expect mortgage rates to trend down once the FOMC clearly signals that they have reached the peak for this cycle, as the reduction in uncertainty with respect to the direction of rates should narrow the spread of mortgage rates relative to Treasury benchmarks.”
Despite inflation showing its slowest pace in two years, the Fed's move is indicative of its concerns over an economy that may be accelerating too rapidly for inflation to settle back to the desired 2% target.
Marty Green, a principal at Dallas-based Polunsky Beitel Green, said the housing sector is again showing signs of slowing, with inventory once again a critical issue.
“The higher mortgage rates triggered by the Fed’s policy have caused more sellers to sit on the sidelines given the large differential between the rate they enjoy on their current home compared to the possible interest rate on any home they may purchase today,” Green said. “This means buyers have fewer choices and may sit on the sidelines as well. If the Fed isn’t careful, this critical industry may once again slow to a crawl in the fall and winter.”
Uncertainty lingers regarding the possibility of further rate increases in the future. The central bank's chair, Jerome Powell, clarified that while the battle against inflation is far from over, there are no predetermined plans for additional rate hikes.
Wage gains spurred by the robust job market might contribute to inflation if businesses adjust by escalating their customer prices. However, the gradual relaxation of inflation pressures provides hope for a "soft landing" - a scenario where the Fed successfully cools inflation without inducing a severe recession.
Despite the robust economic performance, the Fed's preferred measure of inflation, excluding volatile food and energy costs, remains at 4.6%. Some Fed officials believe further hikes may be necessary to temper price pressures as the effect of previous rate hikes has been accounted for.
Going forward, the challenge lies in reducing inflation from the current 3% to the targeted 2% and maintaining the lowered levels. Expectations are that rental costs should continue to decrease as the number of available apartment buildings rises.
Global central banks are also tightening credit, following the Fed's lead. The European Central Bank is set to announce a rate hike, and the Bank of England has already raised its key rate due to escalating inflation.
Looking ahead, Friday will see the release of fresh data on U.S. consumer spending and an update on the Fed's preferred inflation gauge. The inflation measure is predicted to decline to 3% year over year.
