Federal Reserve interest rate reaction mixed

Spoiler alert: Don't expect mortgage rates to come down right away

Federal Reserve interest rate reaction mixed

Mortgage professionals reacted on Wednesday to the Fed’s latest rate hike – an increase of 25 basis points as it continues fighting inflation – with a mixed bag of sentiments over its likely impact on mortgage rates.

The hike represents the 11th increase in 16 months and likely the last one for a while, the central bank signaled. Strongly telegraphed even before the action took place, the benchmark rate hit a range of 5.25% to 5.50% -- the highest level since the Great Recession of 2008-09.

Reactions were decidedly mixed.

Rebecca Richardson (pictured left), a branch manager at UMortgage in North Carolina, was gratified more by the central bank’s tone than the hike itself: “I think the changes to their commentary is a positive sign,” she told Mortgage Professional America. “They acknowledged that inflation is cooling and that they are focused on future inflation data to fine-tune their next moves.”

Stubborn inflation forced the Fed’s hand, she added: “Unfortunately, with as high and persistent as inflation has been, the Fed didn’t have much choice other than being aggressive to bring it down.”

Indeed, the series of rate hikes have had the desired effect of bringing down inflation – now at a rate just over 3% from a 40-year high of 9.1% in June 2022. But the Fed seeks to bring down the rate to 2%, a target low enough for consumer comfort but sufficiently relaxed for the economy to flourish, according to Fed doctrine settled years ago. Exacerbating efforts to reach that target have been a series of Consumer Price Index {CPI) reports showing robust jobs numbers at a time when the Fed seeks to slow consumer demand to tamp down inflation.

While largely effective in bringing down inflation, the Fed’s economic alchemy does nothing to increase the available housing stock, Richardson suggested. “One concern with the market though is even if rates come down with limited inventory, demand will only increase,” Richardson added. “Rates will need to be in a range that homeowners with sub 4% rates are willing to list their homes, but low inventory will persist for some time regardless.”

Aside from inventory, the Fed doesn’t actually set mortgage rates, but its decisions on the federal funds rate have a peripheral effect. The federal funds rate determines the rate at which banks and other financial institutions lend money to each other to meet mandated reserve levels. By helping to lower inflation with its actions, the Fed plays a role in nudging mortgage rates.

Rate hikes – is that all there is?

Yet Paige Hernandez (pictured center), of Heritage MTG based in Chino, Calif., wonders about the repetitive nature of consistent hikes to the interest rate. Historically, past central banks have allowed for some time to pass to test the effectiveness of a rate hike before implementing another – unlike the current Federal Reserve that has raised rates virtually every month without that traditional testing period.

“When is enough, enough?” Hernandez asked rhetorically. “It seems as if the Fed is hellbent on using the one and only tool they have at their disposal, increasing the prime rate, to prove their point. Maybe their economic markers are off base. Maybe they could benefit from a different strategy. Even though prime rate doesn’t directly flow to mortgage rates, we’re definitely feeling it in this sector.”

Lower mortgage rates is a widely shared goal, particularly for those in the industry already dealing with aligned factors making their jobs more challenging – including limited inventory, erosion in affordability, inflation, supply chain issues, and a precipitous drop in refinancing activity.

Melissa Cohn (pictured right), regional vice president of William Raveis Mortgage, believes the impact of the Fed’s actions remains to be seen and is contingent on upcoming jobs reports and CPI data ahead of its next meeting in September (as there is no meeting scheduled in August). She noted that the Federal Reserve’s chairman, Jerome Powell, alluded to this in his commentary as the 2% inflation goal continues to be pursued.

“At the Fed’s Press conference, Federal Reserve chair Jerome Powell said that rates will have to stay higher for longer to achieve the 2% goal, and that rate hikes are starting to work,” she said. “But there is much more to go and their next step will be a result of the data in the next two months.”

Uncertainty continues to linger

In the meantime, uncertainty remains: “The Fed looks for inflation to continue to moderate as the high-rate environment begins to take the toll on employment and consumer spending,” Cohn said. “Both have been surprisingly resilient to date. It could take many more months for inflation to get back to 2%, but we will hopefully see mortgage rates begin to settle down soon.”

The Board of Governors of the Federal Reserve System acknowledged the uncertainty, even after ticking off a list of positive dynamics in its post-rate-hike statement: “The US banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.”

So for now, the more things change, the more they are likely to stay the same.

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