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The Big Rate Hike

June 17, 2022

Last Week in Review: The Big Rate Hike

This past week, the Federal Reserve raised the Federal Funds Rate by .75%, the first such hike since 1994. Let’s walk through what the Fed said and how the financial markets reacted.

“Clearly, today’s 75 basis point increase is an unusually large one and I do not expect moves of this size to be common,” Federal Reserve Chair Jerome Powell.

The largest rate hike in 28 years comes on the heels of the recent Consumer Price Index report, which showed a surprising spike higher in inflation. Up until that reading, the Fed Chair had led the markets to believe the Fed would only raise rates by .50%. However, true to his word, he said the Fed would “be nimble” and respond to the incoming data.

In addition to the rate hike, the Federal Reserve released their updated forecasts on the economy. They raised their expectations on inflation almost a full point from 4.3% to 5.2%. And they lowered their economic growth forecast from 2.8% to 1.7%. Lastly, they raised their forecast for the Federal Funds Rate from 1.9% to 3.4%. On the heels of last Wednesday’s rate hike the Fed Fund Rate is now in a range of 1.50 to 1.75% so the markets are currently expecting about an increase of 1.75% to the Fed Funds rate between now and year-end.

As of this moment, the Fed sees the economy slowing, prices remaining high, and they will be raising rates even higher to help lower inflation.

“I think events of the last few months have raised the degree of difficulty, created great challenges, and there’s a much bigger chance now that it will depend on factors that we don’t control.” Federal Reserve Chair Jerome Powell.

This quote highlights the challenge of the Fed. Can they administer a soft or as Powell says a “soft-ish” landing and avoid an economic recession after hiking rates further?

When Powell says it depends on factors they can’t control, he means energy prices. Powell said, “we have no effect on energy prices”. This makes things harder for the Fed because energy prices are the major contributor to inflation and increasing rates will not have an impact.

It’s important to remember that Fed rate hikes have zero correlation with mortgage rates. It may seem contrarian, but rate hikes are intended to slow demand and lower inflation, which is good for long-term rates as it protects their value over time.

Back to the Future

In 1994, Fed Chair Greenspan raised rates by .75% and at that very moment, long-term rates like mortgages peaked. We will find out if history repeats itself upon Powell’s .75% rate hike this past Wednesday.

For the foreseeable future, expect continued market volatility and uncertainty as we watch to see if inflation peaks and how much the Fed will hike rates – all while avoiding a recession.

Bottom line: As we watch to see if long-term rates peak due to the more hawkish Fed and .75% rate hike, an incredible opportunity remains in housing. Home loan rates remain beneath the current rate of inflation which is something that has not happened in nearly 50-years.

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