The Federal Reserve expected to announce its third interest rate hike on Friday, and if the Fed follows through, mortgage rates will likely rise even further. Although officials said in September that mortgage rates would rise at an average of 1.5 percent in the coming year, the average 30-year fixed mortgage rate is already rising at a record pace. During the past year, the average rate on a 30-year fixed mortgage rose to a record high of 5.62 percent, which is almost double what it was a year ago.
Mortgage rates expected to rise in September
With inflation still above the Fed’s target of 2%, the central bank is preparing to raise Federal Reserve interest rates increase again in September. Economists expect the Fed to make another three-quarter point hike to its key short-term rate.
The fed funds rate is the overnight loan rate banks charge each other. It is also the key rate that influences mortgage rates and many consumer loans. If the Fed raises rates enough, they will impact mortgage rates and other lending products.
After a two-day meeting, the Federal Open Market Committee announced that it was raising the fed funds rate by a quarter percentage point. This was the smallest increase in seven months. But the Fed did signal that it remains on a mission to tame inflation.
Powell said the Fed is “strongly resolved” to tame inflation. That means it’s prepared to take a harder line than ever before and isn’t letting up on its aggressive campaign to lower prices.
But Powell did indicate that the Fed’s battle against inflation was likely to last longer than some anticipated. His preferred measure of inflation has been running three times the Fed’s target, meaning the Fed could still be facing a recession in the near future.
At the same time, the labor market has held up well. Powell said the Fed won’t raise rates until inflation reaches a 2% target. He said the central bank is looking for several reports of steady easing in price gains.
While the rate hike signals that the economy is expanding, it will also drive up borrowing costs for consumers. Mortgage interest rates have already risen to their highest level in years.
As a result, consumers have started spending less. Prices are squeezing Americans, so the Fed is looking for reports of steadily easing gains in prices.
Powell also hinted that the central bank may taper off its rate hikes. But that’s only if the risks of a recession mount.
The Fed did release a summary of economic projections. It includes numerical values for key metrics, such as the unemployment rate, inflation, and the appropriate policy interest rate.
Fed’s preferred measure of annual inflation
It has expected to decline from 6% in October to 5.6% by the end of the year and 3.1% by the end of 2023. It’s no secret that the Fed’s preferred measure of annual inflation is now well above its 2% target. After reaching a 6% level in October, the Fed expects inflation to decline to a level of 5.6% at the end of this year and 3.1% by the end of 2023.
Those are optimistic forecasts, but they’re also based on a hypothesis. The global financial markets have a lot of inertia, and it takes a massive effort to reverse course.
While there’s no certainty that the Fed will cut rates, there’s a growing consensus that it will be more restrictive in the second half of 2022. That means the Fed will be holding off on rate cuts until after inflation has stabilized.
While the US economy is in a much better cyclical position, it may still take years for monetary policy to ease. Until then, the Fed will continue to keep its key short-term interest rate on hold.
In September, the Fed projected a range of four to 4.75% for its fed funds rate, and a jobless rate of three to four percent by the end of next year. As the economy continues to recover, it’s possible that the Fed will continue raising rates, but at a slower pace.
At their last meeting, the Fed’s three main officials agreed that there are downside risks to GDP and inflation projections. They’ll need to work to offset those risks. But a stronger dollar will have a positive effect, lowering prices in the U.S. And improving the global supply chain will help stabilize inflationary pressures in the future.
The Fed’s projections for 2023 had also slightly upgraded, with the unemployment rate predicted to be 4.6%. This marks a significant increase from the previous projection of 3.7%, and is the highest jobless rate in six years.
While the Fed still sees a need to tighten, it’s not backing down from its aggressive campaign to control inflation. A lower federal discount rate helps make borrowing from the Fed cheaper, and the Fed hopes to boost demand.
Fed’s balance sheet
It has dropped from a record high in May 2022 to around $8.58 trillion in December. After two years of “easy money” policies, the Federal Reserve Expected is slowly unwinding its massive balance sheet. This reduction will require major adjustments across private-sector balance sheets. The Fed has already reduced its holdings of bonds from $4.4 trillion in March 2020 to nearly $8.9 trillion in May 2022.
The balance sheet reflects the Fed’s monetary policy efforts to control inflation. As a result, it helps keep short-term interest rates low and facilitates lending and investment. It’s also meant to boost liquidity in the system, so it’s been buying and holding assets in the bond market.
But with the Treasury market now strained, analysts are wondering if the Fed’s balance sheet could be losing its relevance. The Fed’s balance sheet is a major factor to watch in the coming months.
The first part of the Fed’s plan was to shrink its balance sheet by $490 billion in the past two quarters. While this is a significant step, it’s only about a quarter of the total amount that will be reduced in the next few years.
Rather than sell securities when the balance sheet is being reduced, the Fed will let them roll off at maturity without reinvesting the principal payments. However, this process is likely to make interest rates rise over time.
In the process, the Fed will also have to adjust its forecasts for economic growth and inflation. The FOMC plans to trim $95 billion of its securities portfolio each month, which is only about one percent of the total.
A chart of the Federal Reserve System assets shows that the increase in total assets from March to May has been driven by the increase in assets held outright. These include government bonds and mortgage-backed securities.
Moreover, the graph indicates high inflation and a tight labor market. Although the FOMC hasn’t yet specified a specific stopping point, it has said that it will “slowly taper” its asset purchases in November.
To sum up, the Fed has made a big jump in its efforts to control inflation and bolster the economy by reducing its balance sheet. In the future, however, it will need to adapt its policies to enable quicker and more efficient roll-offs of its balance sheet.
Fed’s balance sheet
It has already led to a doubling of the average rate on a 30-year fixed mortgage in the past year. During the last two meetings, the Fed raised its key federal funds rate by a total of 75 basis points. This was the largest rate hike in four meetings. The Fed has indicated that it will raise the rate again, though at a much slower pace.
Several economists predict that the Federal Reserve Expected will continue raising the rate until it hits its target inflation rate of 2%. While the rate has been relatively low for several years, the recent increase has put pressure on the housing market.
Higher interest rates may discourage buyers from purchasing. It also makes it more expensive to borrow money. These factors have been a major factor in the slowing of the housing market.
Several economists believe that the Fed will continue raising rates through 2022. However, some argue that it could stop raising rates soon. A pause in rate increases would give the Fed time to take a more decisive action.
The White House and Fed officials have acknowledged the adverse impact of restrictive monetary policy. They are trying to achieve a soft landing for the U.S. economy.
Inflation reached 8.2% in September. While that’s higher than previous months, it’s still well below the Fed’s goal of 2%. But a more robust economy could keep prices high for a while.
The housing market is already struggling to find buyers. Inflation is affecting the cost of mortgages, as well as rents. As a result, it has a good time to get preapproved for a home loan before interest rates rise even higher.
Interest rate hikes have been a central focus of the Federal Reserve Expected for a number of months. Earlier this year, the Fed indicated it was raising rates by three-quarters of a point. At the same time, the Fed trimmed its holdings of mortgage-backed securities.
Some analysts say the latest move by the Fed has made it harder for new homeowners to purchase a home. The Fed is attempting to curb inflation by reducing the amount of money banks borrow.
