Reasons for the Mortgage Rates Continue to Rise

Anbarasan Appavu

What Was Said at the November FOMC Meeting:

The Federal Open Market Committee (FOMC) voted unanimously to increase the Fed funds rate by 75 basis points, bringing the target range to between 3.75 and 4.00 percent. The benchmark rate is at its highest level since January 2008, when the target rate was 4.25 percent, although it is still 100 basis points below the cycle's peak. Now that this year's target is already above the peak of the 2019 tightening cycle (2.25%), investors and consumers are asking, "When this tightening cycle will end, and how high will interest rates be then?" The statement has been recognized that the Committee will then considering the cumulative tightening of the monetary policy, any of the lags in which monetary policy affects both economic activity as well as inflation, and economic and financial developments' This is a departure from previous meetings and an indication that the tightening cycle is nearing its conclusion.

FOMC – Mortgage Rates Continue to Rise

The Fed Has Even More Ground to Cover:

Economic projections released after the September FOMC meeting indicate that Fed policymakers anticipate the benchmark rate to peak below 5% sometime in 2023. Except for 2019, this would be a lower peak rate than in any previous tightening cycle that ended with the Fed Funds rate at or above 5.25 percent. Inflation has been much more persistent than anticipated at the beginning of this cycle, which has led to consistent upward revisions of expected interest rates. There is a high probability that the December forecasts will continue this trend. Powell repeated this sentiment several times throughout the press conference. Despite a decline from its summer peaks, inflation remains uncomfortably high, above 8% for the CPI and above 6% according to the Fed's preferred measure.

The Real Economy has Adapted, but Resilience Remains:

Thus far, economic activity has been relatively resilient. In September, U.S. companies still added 263,000 employees to their payrolls, helping to maintain the long-term low unemployment rate of 3.5% that existed prior to the pandemic. After experiencing sluggish growth in the first half of the year, the economy expanded by 2.6% in the third quarter. However, not all sectors of the economy are thriving. Financial markets have been volatile, and declines in the first half of the year reduced the value of households' and nonprofits' financial assets by $7.3 trillion in the second quarter alone. In addition, the interest rate-sensitive housing sector has struggled, with construction and new and existing home sales slowing as the cost of purchasing a home at today's prices and mortgage rates has increased by more than 70% in the past year. In September, personal savings fell to 3.1% as consumers grappled with tighter budgets and rising prices. The declining rate of savings could serve as a red flag for future spending growth.

What the Federal Reserve's Statement Means for Homeowners, Buyers, and Sellers

In response to anticipated Federal Reserve actions, mortgage rates for homebuyers and sellers have risen swiftly. In the past 12 weeks alone, mortgage rates have increased by more than 2 percentage points, significantly reducing the purchasing power of homebuyers and likely prompting consumers to reevaluate their budgets. As a result of the rapid movement of mortgage rates, buyers may experience a minor recalibration in the coming weeks, but higher interest rates are likely to persist until inflation makes substantial strides back toward the target of 2%. Before their December decision, the Fed will have two more readings on consumer prices as well as the labor market, as well as one more month of data on the change in PCE prices.


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