The Federal Reserve (Fed) on Wednesday raised the federal funds rate by another 75 basis points, to 2.25%-2.50%, delivering what was expected by most investors and economists in recent weeks.
Designed to control persistent inflation, the decision will likely increase the cost of mortgage borrowing and further slow home sales, as the housing sector is particularly interest-rate sensitive.
To stimulate economic activity during the COVID-19 pandemic, the Fed maintained the federal funds’ rates at 0%-0.25% between March 2020 and March 2022, when it started a tightening monetary policy to slow inflation.
It brought rates back to the level of December 2018 – and marked an end to the easy money that gave rise to the hottest mortgage market in U.S. history.
Surging prices drive the Fed. Inflation in the U.S. hit 9.1% in June, the highest level in 40 years, the Bureau of Labor Statistics reported on July 13. By then, the news raised the specter that the Fed would raise the benchmark rate by 75 or even 100 basis points today.
On Thursday, gross domestic product data will be released, and observers believe it will show that the U.S. economy grew marginally or shrank again in the second quarter, which officially marks a recession.
In the housing market, the tightening monetary policy has brought volatility to mortgage rates. According to the latest MMS survey from Freddie Mac, after jumping 20 basis points in the previous week to 5.50%, purchase mortgage rates increased last week to 5.54%.
Meanwhile, home-price growth nationwide downshifted further in May, posting a 19.7% annual gain, compared with a 20.6% increase in March and a 20.4% jump in April, the latest S&P CoreLogic Case-Shiller Home Price Indices report shows.
“Affordability is the biggest issue in the housing market today, and higher rates will make that worse on a monthly basis, even as the Fed does the important work of slowing down price growth,” said Skylar Olsen, Zillow’s chief economist, in a statement.
Sales of new single-family houses reached 590,000 in June, at a seasonally adjusted annual rate, down 8.1% compared to May, the U.S. Census Bureau and the Department of Housing and Urban Development reported on Tuesday.
“Because the housing sector is particularly interest-rate sensitive, it is one of the primary levers through which tighter monetary policy can slow economic activity,” Doug Duncan, chief economist at Fannie Mae, said in a statement. “We continue to forecast slowing home sales through the rest of the year as the Fed continues to raise interest rates and run off its balance sheet.”