Interest Rate Hike Imminent in Wake of Federal Reserve Meeting
As expected, the Federal Reserve Open Markets Committee left rates unchanged at near zero at its January 26 meeting, but don’t expect the Fed to hold rates at these historically low levels for much longer. The Fed is facing mounting pressure to increase borrowing rates as consumers deal with skyrocketing inflation. According to the Fed’s statement, "With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.” Many experts took that to mean the possibility of a .50% increase (or 50 basis points), rather than a .25% one, was now on the table for March.
The anticipated rate hike in March would be the first in more than three years. The Fed lowered rates in early 2020 to provide emergency stimulus to the economy, shocked by the breakout of COVID-19. Additionally, the Fed began purchasing U.S. Treasuries and mortgage-backed securities in an effort to drive down borrowing rates, provide liquidity and stimulate the economy. The asset purchase program is expected to end in March, just in time for the first rate hike.
With a “strong labor market” and consumer prices growing at 7% annually, the Fed must now pivot to a new strategy: controlling inflation. Historically low rates pose the risk that the economy may be overheating as consumer prices outpace wage growth. Runaway inflation rates have already caused the Fed to speed up its timeline for winding down stimulus and hiking interest rates. Now, a 50 basis point rate hike in March seems more likely, causing the Fed to forfeit the prospects of a “soft landing.”
To be sure, the recent spike of volatility in the financial markets reflect the need for urgency with respect to the Fed’s monetary policy. The S&P 500, led by the tech sector, has traded off nearly 14% since the beginning of the year as investors continue to worry about the removal of emergency Fed stimulus. Interest rates, in anticipation of Fed rate hikes and the end of asset purchases, have moved much higher as well. 10yr Treasury yields and 30-year mortgage rates are each about 40 basis points higher year-to-date.
Jeremy Collett is Guaranteed Rate’s Executive Director of Capital Markets. Market Updates are designed to provide readers with a high-level yet insightful view of how economic news, events and trends affect mortgage rates and the homebuying process.
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