At its Wednesday meeting, the U.S. Federal Reserve tightened monetary policy by a massive amount. Also, other global central banks took aggressive steps to fight inflation. As a result, mortgage rates reached their highest levels since 2008.
Federal Reserve Tightened Monetary Policy at June Meeting
When the Federal Reserve tightened monetary policy, they raised the federal funds rate by 75 basis points. Conclusively, this number reflects the largest increase since 1994. In addition, the Federal Reserve indicated that many more rate hikes will take place in coming months.
Chair Powell said that the Federal Reserve likely plans to raise the federal funds rate by 50 or 75 basis points at their July meeting. Examining the average of the “dot plot” forecasts, analysts believe that the federal funds rate rises to 3.40% by year’s end. Furthermore, analysts expect the federal funds rate to reach a peak of 3.80% in 2023.
Notably, these figures climbed significantly higher than the prior projections in March. Additionally, officials lowered their forecasts for GDP growth in 2022 to 1.7% from 2.8%. moving forward, the Federal Reserve remains tough on inflation despite slowing economic growth.
Consumer Spending & Housing Starts Fall in May
Aside from the Federal Reserve tightening monetary policy, consumer spending and housing starts both fell in May. First, consumer spending accounts for over two-thirds of US economic activity. Thus, consumer spending indicates economic health.
Although analysts expected a slight gain in retail sales, they instead fell 0.3% from April. Analysts attributed the shortfall to a sharp decline in vehicle, furniture, and electronic sales. Despite the negative reading in May, consumer spending hovers a strong 8% higher than a year ago.
Meanwhile, home buyers desperately need more inventory in many regions. In May, housing starts fell 14% from April, far below the consensus forecast, to the lowest level since April 2020. Building permits, a leading indicator of future activity, also fell short of expectations with a 7% decline from April. Once again, builders reported higher prices and shortages for land, materials, and skilled labor as issues holding back a faster pace of construction.
Looking Ahead After Federal Reserve Tightened Monetary Policy
After the Federal Reserve tightened monetary policy, investors continue to closely follow news on Ukraine and COVID-19 case counts in China. Also, investors look for additional Fed guidance on the pace of future rate hikes and bond portfolio reduction.
Beyond that, the coming week contains light economic reporting. Mortgage markets close on Monday in observance of Juneteenth. Existing Home Sales release on Tuesday. Later New Home Sales on Friday.
As the Federal Reserve tightened monetary policy with a 75-basis point increase, mortgage rates rose to their highest level since 2008. Never miss an update with MBSQuoteline. To receive by-the-minute updates on mortgage-backed securities, try our platform free for 14 days.
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