Federal Reserve's inflation-busting tactics slammed

Mortgage veteran claims 'wrong' approach is hurting economy

Federal Reserve's inflation-busting tactics slammed

The Federal Reserve’s apparent inability to rein in runaway inflation is hitting the pockets of ordinary homeowners as they struggle to cope with rising mortgage rates and the cost-of-living crisis, Melissa Cohn (pictured), regional vice president at William Raveis Mortgage, has said.

Cohn, a mortgage industry veteran with more than 40 years’ experience, said the speed at which mortgage rates had increased had caught her by surprise, adding that spiraling inflation and the apparent inability by the Federal Reserve to control matters would soon begin to take their toll on borrowers.

“The biggest surprise is just how far and how fast rates have gone over the course of the past three months. We were living under the understanding that the Fed said that inflation was transitory, and they were wrong,” she said, adding that the “massive increase” in interest rates “is really hurting the economy”.

Interest rates for 30-year fixed mortgages have risen steadily since January, when they were hovering around the 4% mark before surging well past the 6% barrier in June.

Rates nonetheless appear to have levelled out more recently and are now hovering around 5.57%, down by roughly 27 basis points in the last seven days, according to Bankrate.

Cohn made the comments last week, shortly before the Federal Reserve increased the base rate by 75 percentage points for the second month in a row.

Read more: GDP drop stokes recession fears – will it cause a housing crash?

Cohn, who had been much more bullish about the country’s economic prospects before the Russian invasion of Ukraine, said the fuel supply chain disruptions caused by the conflict had made inflation worse - and the Fed appeared to have no answer.

“Raising interest rates is not going to necessarily moderate any of those things. But I think that’s just due more to the fact that although the levels of consumption are going down, the war in Ukraine is not ending,” she said.

She criticized the Fed for focusing primarily on employment over the past two-and-a-half years “at the cost of the economy”, with layoffs as a result.

She said homebuyers were feeling the pinch especially because wage rises were not keeping up with inflation. Asked how this compared to when she started out in the industry decades ago, she said:

“This is a much more punishing rate of inflation. Things like the rate at which we’ve earned money in our bank or savings accounts has also not increased to be more reflective of the rate of inflation,” she pointed out.

On the upside, Cohn reckoned the housing market was now undergoing a “much healthier” period of “normalization” with figures showing that the sector was slowing down.

Read more: US home price growth: The tides have finally turned

According to recent data, existing home sales have been falling for the past five months, while mortgage applications are at a 22-year low and purchase volume is down by 90% compared to a year ago.

Cohn said the current market conditions would offer sensible opportunities for prospective homebuyers and also separate the wheat from the chaff in the mortgage industry.

“We’re all hopefully going through a period of normalization where we are no longer just in a frenzy-fueled seller’s market, and where buyers have the ability to go out and look at one or even 10 houses and are able to contrast and compare without having to be forced to bid.”

Having to fight for a shrinking share of the market, with the looming threat of a recession making lenders more cautious, was not a bad thing necessarily, she argued. 

“It’s time for the cream to rise to the top and that we make sure that we have a well-educated, well-seasoned industry. It’s no longer a case of becoming a mortgage broker because everyone’s selling loans at 3%,” she remarked.

“When we go into a trickier economic cycle and people don’t necessarily always qualify so easily and simply, you need to do a better job of educating and making sure you’re finding the right product and the right loan for your consumer.”