"The mortgage market had already priced in the Fed's increase"
Federal officials, on Wednesday, approved lifting its benchmark short-term interest rates by a quarter percentage point to a range of 0.25% to 0.5% in an effort to combat inflation that has escalated to a four-decade high.
This is the first rate hike the Fed has made since 2018 and may not be the last as officials signaled that they expect to increase the rate at each of the remaining six meetings in 2022, which would boost the rate to between 1.75% and 2% by the end of the year. As a result, increased borrowing costs for mortgage loans, credit cards, and auto loans will likely follow suit.
“With the unemployment rate below 4%, inflation nearing 8%, and the war in Ukraine likely to put even more upward pressure on prices, this is what the Fed needs to do to bring inflation under control,” said Mike Fratantoni, chief economist of the Mortgage Bankers Association. “The FOMC economic projections indicate slower growth and higher inflation than had been the expectation at their December meeting. Note that they do not expect to be back at 2% inflation until after 2024.”
Marty Green, principal at Polunsky Beitel Green, said that an increase in interest rates will likely moderate price increases in many residential mortgage markets as home affordability becomes a larger issue with each rate hike.
“The mortgage market had already priced in the Fed’s increase today and was anticipating further increases in the coming months. The uncertainty created by the crisis in Ukraine, however, has moderated the impact of some of those anticipated rate increases as a flight to safety increased demand for US treasuries and mortgage bonds,” Green added.
MBA expects mortgage rates, which have been exceptionally volatile in recent weeks, to climb to around 4.5% over the next year.
Beyond the short-term rate hikes, the Fed also announced plans to reduce its roughly $9 trillion balance sheet, which will also tighten credit for many borrowers.
“Although we anticipate that shrinking the balance sheet will begin this summer, we will be looking for details regarding the pace of the runoff and whether they would consider active MBS sales at some point to return to an all-Treasury portfolio,” Fratantoni said.