Another 75-Basis Point Rate Hike from the Fed Puts More Pressure on Housing

In a move that will add further headwinds to an already down housing market, the Federal Reserve’s monetary policy committee yesterday raised the federal funds target rate by 75 basis points, increasing that target to an upper bound of 3.25%. This marks the third consecutive meeting with an increase of 75 basis points as the Fed continues to move aggressively in an effort to rein in stubbornly high inflation. And the Fed’s leadership has signaled they intended to hold these elevated rates well into 2024 as the central bank attempts to slow the economy without throwing it into a recession.

But even Fed Chairman Jerome Powell conceded a recession is possible, particularly if the Fed continues to move aggressively to tighten monetary policy. “No one knows whether this process will lead to a recession, or if so, how significant that recession would be,” Powell said at his news conference following the announcement of yesterday’s Fed rate hike. “That’s going to depend on how quickly we bring down inflation.”

While noting that the Fed is under enormous pressure to control inflation, NAHB Chairman Jerry Konter said that “aggressively focusing on raising interest rates in lieu of fixing our supply-chains could do catastrophic harm to an already ailing housing market and prove to be a counterproductive move that will do more harm than good to the overall economy.” Konter urged the central bank to take these factors into consideration and to move in a more prudent manner going forward to help builders increase the supply of affordable housing.

Among the clear signs of economic slowing are just about every housing indicator, including nine straight months of declines for home builder sentiment. Indeed, an open macro question is whether the economy experienced a recession during the first half of 2022, during which the economy posted two quarters of GDP declines. The missing element from the recession call: a rising unemployment rate, which is coming.

Regardless, given declines for single-family permits, single-family starts, pending home sales and rising sales cancellations rates, it is clear a housing industry recession is ongoing. The pain of this is clear in terms of the large economic impact housing has on the overall economy.

Looking forward, the Fed’s “dot plot” indicates that the central bank expects the target for the federal funds rate will increase by 75 more basis points in November, 50 in December, and then conclude with 25 points at the start of 2023. This would take the federal funds top rate to near 4.8%.

Combined with quantitative tightening from balance sheet reduction (in particular $35 billion of mortgage-backed securities [MBS] per month), this represents a significant amount of monetary policy tightening over a short period. Given this policy path, a hard landing with a mild economic recession is all but unavoidable to bring inflation back to the Fed’s target. By 2025, the Fed is forecasting a return to a normalized rate of 2.5% for the federal funds rate.

Chief Economist Robert Dietz provides more insights into the Fed’s policy, and how it could impact the economy — and the housing industry specifically — in this Eye on Housing post.