To counter high inflation, the Federal Reserve on Wednesday raised short-term interest rates for the first time since 2018, increasing the benchmark Federal Funds Rate by 0.25%, to a target range of between 0.25% and 0.50%.
The FOMC noted in its statement that the economic outlook remains “highly uncertain” in the face of the war in Ukraine.
“The invasion of Ukraine by Russia is causing tremendous human and economic hardship,” the FOMC says in its March statement. “The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”
Projections indicate the FOMC will vote to raise rates up to six more times this year in order to bring inflation back toward its stated objective of 2%. That would mean the Fed Funds Rate would be 1.75% higher at the end of this year compared with the end of 2021.
Despite rising inflation, “economic activity and employment have continued to strengthen,” in March.
“Job gains have been strong in recent months, and the unemployment rate has declined substantially,” the FOMC statement says.
“Fed officials downgraded their forecast for economic growth to 2.8%, down from their 4% estimate in December, while there was a big increase in inflation forecasts – core Personal Consumption Expenditures (PCE) Index now expected to be 4.1%, up from 2.7%,” says Odeta Kushi, deputy chief economist for First American, in a statement.
“One of the biggest components of both the Consumer Price Index and PCE is housing,” Kushi says. “Due to how the housing components of inflation are measured, they tend to lag the observed rental and house price increases by approximately one year. It’s just beginning to show up in official estimates and will keep overall inflation elevated.”
“The Fed also indicates that balance sheet reduction is coming, possibly as soon as May, which has implications for the housing market,” Kushi says. “While changes to the Federal Funds rate may not directly impact mortgage rates, ‘quantitative un-easing’ does place upward pressure on mortgage rates.”
Kushi notes that as mortgage rates increase and buyers pull back, home price appreciation will moderate.
“As rates rise, some buyers on the margin will pull back from the market and sellers will adjust price expectations, resulting in a moderation in house price appreciation,” she says.
“The other implication of a rising mortgage rate environment is the rate lock-in effect,” she adds. “Many homeowners have locked into historically low rates, and are less likely to move as rates move higher – this does not bode well for housing supply.”