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Rates Spike on Tough Fed Talk

March 25, 2022

Last Week in Review: Rates Spike on Tough Fed Talk

Home loan rates ticked up to fresh three-year highs as a parade of Federal Reserve officials spoke throughout last week about the need to hike rates more aggressively to combat inflation. Let’s walk through what happened last week and talk about the big reports this week.

“There is an obvious need to move expeditiously to a more neutral level and more restrictive levels if needed to restore price stability,” Fed Chair Jerome Powell – 3.21.22.

This quote, along with several others from Mr. Powell sent the bond prices lower and rates touching three-year highs. It suggested the Fed will need to hike the Fed Funds Rate quickly to get to a more neutral rate, where the Fed Funds Rate neither hurts nor helps the economy. Presently, the Fed Funds Rate is between .25% – .50%.

What would be a neutral rate? Atlanta Fed President Bostic, who was also speaking this week, said the neutral rate is 2.40%. So, this means the Fed wants to hike the Fed Funds Rate by 2.00% or 8 more .25% hikes to get to Bostic’s neutral rate.

Mr. Powell also said they could move to more “restrictive levels,” which would mean even more rate hikes and a Fed Funds Rate higher than 2.40%.

“Risk is rising. An extended period of high inflation could push longer-term expectations uncomfortably higher.” Jerome Powell.

This quote speaks as to why long-term rates have risen so fast of late and why the Fed is speaking so tough this week. The major fear of the Fed is for long-term inflation expectations to rise – meaning, people will expect higher prices in the future. If people expect higher prices, we will see higher prices. This disruption to price stability is exactly what the Fed wants to fight.

Housing Already Seeing the Effect of Higher Rates

New Home Sales for February showed sales of newly built homes decline from a downwardly revised January number. Overall, New Home Sales are down 6.2% from February 2021.

NAHB Chief Economist Robert Dietz said, “New home sales softened in January and February as mortgage rates increased.”

A new home sale occurs when a sales contract is signed, or a deposit is accepted. The home doesn’t have to be built or even started to be considered a new home sale. Of the 407,000 new homes available for sale only 35,000 are built and ready to be occupied.

The median home price of a new home rose to $400,600, up 10.6% from February 2021, despite a sharp 20% increase in building materials over that time.

It’s clear that housing has cooled a bit, which is exactly what the Fed wanted. What remains unclear is if, when, and how much the Fed could hike rates as an interest rate sensitive sector, like housing, has already slowed down.

Bottom lineThe tough Fed talk hurt long-term rates like mortgages, last week. It remains to be seen if the Fed can act as tough as they talk. If you, a family member, or a friend is considering a mortgage, now is a great time as rates remain below the rate of inflation … something that hasn’t happened in nearly 50 years.

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