Higher Mortgage Rates Expected Following Fed Policy Pivot

The Federal Reserve on Dec. 15 signaled that it will be shifting from an accommodative monetary policy stance that has supported the economic rebound from the 2020 recession toward a tighter policy as a direct result of ongoing, elevated inflation data.

For the housing community, this policy pivot means that mortgage interest rates are likely to rise in 2022. This will reduce housing affordability and again emphasizes the need for policymakers to enact solutions to fix the nation’s supply chains that are impeding more robust housing construction.

At the conclusion of its December policy meeting, the Fed announced changes to its outlook and projections in response to increased inflation data and inflation expectations that will yield higher interest rates in 2022 because of tighter monetary policy.

The announcement makes several changes to both the Fed’s economic outlook and its implied monetary policy path:

• Acceleration of tapering of purchases of mortgage-backed securities and Treasuries
  • The central bank will double the pace of tapering with an anticipated conclusion of bond purchases in March 2022.
• Retirement of “transitory” inflation expectations
  • The Fed’s outlook notes that supply-demand imbalances are contributing to “elevated levels of inflation.”
  • The Fed’s economic projections increased its estimate for 2021 inflation (under the core PCE measure) from 3.7% to 4.4%.
  • As an indication that inflation will persist well into 2022, the projection for inflation next year increased from 2.3% to 2.7%.
• Higher interest rates sooner
  • The Fed did not announce a change in the federal funds target rate.
  • However, its announcement/outlook suggests three 25 basis point rate hikes in 2022 and three more in 2023.

This implied tightening is consistent with NAHB’s existing forecast of a 2% 10-year Treasury rate near the end of 2022. This higher rate also implies the 30-year mortgage rate rising somewhat higher than 3.6% by the end of next year.

NAHB Chief Economist Robert Dietz provides more analysis in this Eye on Housing blog post.