The Federal Reserve raised short-term interest rates for the first time since 2018 amid high inflation. The Federal Open Market Committee noted that despite strong job gains in recent months and declining unemployment rates, inflation has remained 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 0.25% to a target range of between 0.25% and 0.5%. The Fed had kept rates near zero since the onset of the COVID-19 pandemic in March 2020.
“With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2% objective and the labor market will remain strong,” the Committee said in its March statement. The Committee said it anticipates its increase of the target range “will be appropriate.”
In its statement, the Fed noted that the economic outlook remains “highly uncertain” due to the invasion of Ukraine by Russia. The Committee noted that in the near term the invasion and related events “are likely to create additional upward pressure on inflation and weigh on economic activity.”
The Committee said it will continue to monitor the “implications of incoming information for the economic outlook” and will be prepared to adjust the stance of monetary policy “as appropriate if risks emerge that could impede the attainment” of its goals.
Projections released by the Federal Open Market Committee signal the likelihood of the Fed raising rates up to six more times this year.
Zonda chief economist Ali Wolf says it's important to remember that when the Fed raises interest rates, they are raising the federal funds rate, which tracks interbank lending versus the borrowing cost for a 30-year fixed rate mortgage.
"The federal funds rate has historically been moderately correlated with the 30-year fixed rate mortgage, mirroring directional change but not telling much regarding volume," she says. "As such, we shouldn’t expect the Fed rate increases to directly cause a one-to-one change in mortgage rates."
Wolf adds that, comparatively, the 10-year Treasury yield has moved nearly one-to-one with mortgage rates, which is why tracking the current and forecasted yield can tell you much more about the mortgage market. Equities markets have priced in the majority of the expected rate increases from the Federal Reserve and the underlying inflation trends, which is why mortgage rates are already above 4%.
Higher mortgage rates are expected to create negative pressure on demand due to the impact on affordability over time, according to Wolf. For example, a change from a 3% mortgage rate to a 4% one is roughly the equivalent of 13% top-line appreciation.
"Given the price increases seen over the last two years, it will be important to track affordability carefully," she says. "In the short term, it appears strong demand factors and limited inventory are more powerful than the affordability constraints brought on by higher mortgage rates and higher home prices. The question is—how long will that last?"
Nikolas Scoolis, manager of housing economics at Zonda, contributed to this article.
