The Federal Reserve’s monetary policy committee approved a 50 basis point increase for the federal funds target rate, following a 25 basis point increase in March. Despite “robust” job gains in recent months and “strong” household spending and business investment,” the Federal Open Market Committee notes that inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.
The U.S. central bank lifted its benchmark Federal Funds Rate by 0.5% to a target range of between 0.75% and 1% and anticipates that “ongoing increases in the target range will be appropriate.”
“The Federal Reserve has committed to not surprising the markets or Americans with changes in their policy,” says Zonda chief economist Ali Wolf. “The 50 basis point increase was expected as inflation remains elevated and the labor market hot. Financial markets are generally efficient, and we’ve seen that over the past few months. Investors have been well aware of the expected policy changes and preemptively reallocated some of their funds. This is why we’ve already seen mortgage rates jump to over 5%.”
In addition to the change in the federal funds target rate, the committee also provided details for its plan to reduce its balance sheet, a move that NAHB chief economist Rob Dietz believes will further tighten financial conditions. Dietz says both moves by the committee will produce higher mortgage rates in 2022 and 2023 as the Federal Reserve continues to attempt to curb inflation.
While there is not a direct connection between federal fund rate increases and changes in long-term interest rates, the housing market is an interest rate sensitive part of the economy.
“The average monthly mortgage payment for those entering the market has risen 30% since the start of the year from the rise in mortgage rates alone,” Wolf says. “So far, the housing market has held up perfectly fine as people are rushing to buy what limited available inventory is on the market before home prices and mortgage rates rise much higher. We are expecting a cooling in the housing market, though, as affordability creates a challenge for home shoppers.”
