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March 19, 2022

Federal Reserve approves first interest rate hike in more than three years, sees six more ahead


The Federal Reserve on Wednesday approved its first interest rate increase in more than three years, an incremental salvo to address spiraling inflation without torpedoing economic growth.

After keeping its benchmark interest rate anchored near zero since the beginning of the Covid pandemic, the policymaking Federal Open Market Committee said it will raise rates by a quarter percentage point, or 25 basis points.

That will bring the rate now into a range of 0.25%-0.5%. The move will correspond with a hike in the prime rate and immediately send financing costs higher for many forms of consumer borrowing and credit. Fed officials indicated the rate increases will come with slower economic growth this year.

Along with the rate hikes, the committee also penciled in increases at each of the six remaining meetings this year, pointing to a consensus funds rate of 1.9% by year’s end. That is a full percentage point higher than indicated in December. The committee sees three more hikes in 2023 then none the following year.

The rate rise was approved with only one dissent. St. Louis Fed President James Bullard wanted a 50 basis point increase.

The committee last raised rates in December 2018, then had to backtrack the following July and begin cutting.

In its post-meeting statement, the FOMC said it also “anticipates that ongoing increases in the target range will be appropriate.” Addressing the Fed’s nearly $9 trillion balance sheet, made up mainly of Treasurys and mortgage-backed securities it has purchased over the years, the statement said, “In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.”

Fed Chairman Jerome Powell at his post-meeting news conference hinted that the balance sheet reduction could start in May, and said the process could be the equivalent of another rate hike this year.

The Fed’s ‘unrealistic’ tightening plan will spark market pain, says Bleakley’s Boockvar

The indication of about 175 basis points in rate increases this year was a close call: The “dot plot” of individual members’ projections showed eight members expecting more than the seven hikes, while 10 thought that seven total in 2022 would be sufficient.

“We are attentive to the risks of further upward pressure on inflation and inflation expectations,” Powell said at the news conference. “The committee is determined to take the measures necessary to restore price stability. The U.S. economy is very strong and well-positioned to handle tighter monetary policy.”

Officials also adjusted their economic outlook on multiple fronts, seeing much higher inflation than they expected in December and considerably slower GDP growth.


March 12, 2022

Mortgage Applications Down 13%

Credits: CNBC

  • Total mortgage applications decreased 13.1% last week to the lowest level since December 2019
  • The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 4.06% from 4.05%
  • Applications to refinance dropped 15% weekly and were 56% lower than one year ago.
A "for sale" sign in front of a home that Zillow shows has a pending sale of 750,000 dollars on February 18, 2022 in Miami, Florida.
A “for sale” sign in front of a home that Zillow shows has a pending sale of 750,000 dollars on February 18, 2022 in Miami, Florida.
Joe Raedle | Getty Images

Climbing mortgage rates are hitting both potential homebuyers and refinance candidates. Total mortgage applications decreased 13.1% last week to the lowest level since December 2019, according to the Mortgage Bankers Association. Applications to refinance dropped 15% weekly and were 56% lower than one year ago.

“Higher mortgage rates have quickly shut off refinances, with activity down in six of the first seven weeks of 2022,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 4.06% from 4.05%, with points rising to 0.48 from 0.45 (including the origination fee) for loans with a 20% down payment.

Those higher mortgage rates combined with high prices and low inventory pushed applications to purchase a home down 10% weekly and 6% lower than one year ago. This was the third straight week of declines for purchase applications.

The average purchase loan size in the MBA weekly survey didn’t increase, but at $450,200, it stayed very close to the survey’s record high of $453,000, which was hit the week ended Feb. 11.

Low inventory and high prices lead to lower home-buying traffic and steep competition

Home prices have been climbing steadily and didn’t let up in 2021. The S&P CoreLogic Case-Shiller Home Price Index was released Tuesday, and 2021 registered the highest calendar-year increase in 34 years, according to Craig J. Lazzara, managing director at S&P DJI. Prices nationally were up 18.8% in 2021 versus a 10.4% gain in 2020.

Rising mortgage rates will pose a challenge for some buyers, likely leading to less demand. Lazzara predicts that price growth will soon slow in reaction to higher rates.

“We have previously suggested that the strength in the U.S. housing market is being driven in part by a change in locational preferences as households react to the COVID pandemic,” Lazzara said. “More data will be required to understand whether this demand surge simply represents an acceleration of purchases that would have occurred over the next several years rather than a more permanent secular change. In the short term, meanwhile, we should soon begin to see the impact of increasing mortgage rates on home prices,” he said. 

Inflation Accelerates in February as Energy Prices Jump, but Labor Market Indicators Remain Strong

Credits: Fannie Mae Housing Wire

  • The Consumer Price Index (CPI) increased 0.8 percent in February and 7.9 percent on an annual basis, the fastest in 40 years, according to the Bureau of Labor Statistics (BLS). Energy prices rose 3.5 percent over the month, led by a 6.6 percent jump in gasoline prices as oil prices increased. In part due to these higher oil prices, food at home prices rose 1.4 percent, their largest monthly gain since April 2020. Excluding food and energy, core prices rose 0.5 percent over the month and 6.4 percent annually, also the fastest rate since 1982. New vehicle prices increased 0.3 percent after being flat in January, while prices for used cars and trucks declined 0.2 percent. Shelter costs were up 0.5 percent over the month and 4.7 percent over the year, the fastest annual rate since 1991. Rent of primary residences increased 0.6 percent and owners’ equivalent rent (OER) was up 0.4 percent for the sixth consecutive month. On an annual basis, rent was up 4.2 percent and OER increased 4.3 percent. Prices in the travel/hospitality industry also increased, with airline fare up 5.2 percent and lodging away from home increasing 2.5 percent.
  • The National Federation of Independent Business (NFIB) Small Business Optimism Index declined 1.4 points to 95.7 in February, its lowest level since January 2021. Only 19 percent of firms on net reported plans to increase employment, a decline of 7 percentage points and also the lowest level since January 2021. On net, 68 percent of firms are raising average selling prices, an increase of 7 percentage points and a series record, while the percentage of firms raising worker compensation fell 5 points to 45. The net percentage of firms planning on raising selling prices and worker compensation in the future each ticked down 1 percentage point to 46 and 26, respectively. Twenty-six percent of firms rated inflation as their single most important problem, a record since the monthly survey started in 1986.
  • The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings declined by 185,000 but remained at the second highest level in series history at 11.3 million in January, according to the BLS. Openings in leisure and hospitality fell 314,000 to 1.7 million while openings in manufacturing increased 109,000 to 855,000. Openings in construction increased by 21,000 to 380,000. Quits fell for the second consecutive month but remained elevated at 4.3 million.
  • Consumer (non-mortgage) credit outstanding increased by $6.8 billion in January, according to the Federal Reserve Board. Revolving credit (largely credit cards) declined by $219 million, while non-revolving credit (largely auto and student loans) increased by $7.1 billion.
  • The real goods U.S. trade deficit widened by $6.4 billion in January to a series record, according to the Census Bureau. Real exports dropped 3.9 percent while real imports increased 0.1 percent.
Forecast Impact:

The CPI print was largely in line with our expectations and is unlikely to significantly alter our forecast. However, rapidly rising food and energy costs, which together contributed nearly half of the month-over-month gain in February, are likely to be even higher in the March report given the recent surge in oil and agriculture commodity prices related to the Russian invasion of Ukraine. While there is a high degree of uncertainty regarding the conflict and its impact to our forecast, we are likely to upgrade our near- and medium-term inflation expectations based on three factors: 1. The recent jumps in oil prices and agriculture commodities plus the likelihood of higher demand for U.S. natural gas as Europe moves to decrease its dependence on Russian energy; 2. A slower pace or resolution for global supply chain disruptions, and; 3. The general inflationary effects from higher transportation and shipping costs. These higher inflationary pressures will weigh on real incomes, and, therefore, we expect them to weigh on demand. Combined with growing financial market volatility, we expect to downgrade our 2022 GDP outlook based on recent events.

Fortunately, however, unlike the high inflationary period in the late 1970s/early 1980s, the U.S. is currently experiencing one of the strongest labor markets on record, pointing to near-term resilience. While quits have fallen from their recent peaks, the level remains nearly 20 percent higher than the number of quits that occurred in January 2020, indicating workers are confident they can find new, likely better-paying jobs (a Pew research study showed 63 percent of workers who quit their jobs in 2021 cited low pay as a reason for leaving). That’s consistent with job openings remaining near record highs. Given high inflation and a strong labor market, we continue to expect the Fed to begin hiking rates at their meeting next week.

Although business optimism declined in February, we haven’t yet seen a major pullback in business activity from other indicators. Further, the NFIB survey hinted that some future inflationary pressures may be easing modestly, as businesses indicated fewer planned price and wage increases (however this data point preceded the Ukraine conflict).