A highly scrutinized two-day meeting of the Federal Reserve that concluded Wednesday resulted in no new interest rate hikes, though the central bank appears poised to move forward with an increase in the next few months following persistent inflation and an accelerating economic recovery.
“With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the Fed wrote in a statement following the meeting’s conclusion on Wednesday, Jan. 26.
After referring to inflation—which peaked at a historic year-over-year increase of 7% in December—as “transitory,” the Fed appears to have pivoted somewhat, increasing the taper of its asset purchases—emergency measures which are now expected to finish in March. Fed members have also indicated that 2022 is likely to see three or four rate hikes, which has already pushed mortgage rates up slightly from their 2021 lows.
Markets were down following the meeting after pushing higher through the morning, with all three major stock indexes dropping in afternoon trading Wednesday.
The Fed has been extremely careful not to commit to any specific timeline, saying it will react to new developments specifically in the pandemic and the job market. Raising rates will be predicated on so-called “maximum employment” and the bank continues to aim for 2% inflation “in the long run.”
In a press conference after the meeting, Fed chair Jerome Powell said that current market conditions were “consistent with maximum employment,” though he also cited the ongoing Omicron surge as hampering labor market health in the short term.
“[Omicron will] surely weigh on economic growth this quarter. High frequency indicators point to reduced spending in covid sensitive sectors,” he said. “And activity more broadly may also be affected as more workers may be unable to report to work.”
While many observers expect a rate hike in early spring, Powell said that the Fed has not made any decision on that front.
“It is not possible to predict with much confidence exactly what path for our policy rate is going to prove appropriate, and so this time we haven’t made any decisions about the path of policy,” he said. “And I stress again we will have to be humble and nimble.”
A significant question regarding potential rate hikes is whether the Fed’s first increase will more than a quarter-point, says Matthew Gardner, chief economist for Windermere Real estate.
“They have to raise rates given the inflation environment we are in right now,” he says. “I still believe it’s transitory, but the question is how do you define that term. It is going to be transitory, but it’s going to be over a longer period of time. I’m still seeing inflation in the 3% range in 2023.”
Mortgage rates are almost certain to rise in response to any interest rate hikes, which will certainly affect the housing and real estate markets, according to Gardner, who says he doesn’t anticipate the housing market will see sales surpass their 2021 performance as rates and home prices continue to climb.
“Investors want to see growth and it’s going to be hard to come by,” he says. “I don’t think we are going to see growth in transactions, and I think that increasing interest rates is going to play into a lot of markets because it’s further going to diminish housing affordability.”
“I think that rates have certainly seen a significant spike relative to where they were, however, we’re still talking sub-4% [in 2022],” he adds.
This is in-line with other industry observers, as the Mortgage Banker Association’s chief economist Mike Fratantoni predicted a similar path, with rates reaching around 4%.
“MBA is holding on to our forecast that the combination of a stronger economy, persistent inflation, and the reduction of monetary policy accommodation will all push towards somewhat higher mortgage rates, with the 30-year fixed rate hitting 4% by the end of 2022,” Fratantoni said in a statement.
Jesse Williams is RISMedia’s associate online editor. Email him your real estate news ideas to jwilliams@rismedia.com.
Jordan Grice is RISMedia’s associate online editor. Email him your real estate news to jgrice@rismedia.com.
