Group reveals how Russia's invasion of Ukraine is "complicating" the Fed rate hike
The Federal Reserve’s difficult task of raising interest rates to slow inflation has been “further complicated” by the Russian invasion of Ukraine, according to Fannie Mae. Despite market uncertainty, the GSE’s Economic and Strategic Research (ESR) Group still expects the Fed to increase rates at least five times in 2022 and eight times total through 2023.
“A slowing economy, decades-high inflation, expired fiscal stimulus, tightening monetary policy, and now Russia’s invasion of Ukraine are all weighing on the health of the US economy,” said Fannie Mae chief economist Doug Duncan. “We marked down our growth expectations this month by half a percentage point for 2022, but risks remain firmly to the downside. The interruptions to the trade of energy, agriculture, and other commodities are putting upward pressure on inflation and making an already difficult task for the Federal Reserve even more challenging.”
The ESR Group downgraded its full-year 2022 real GDP growth projection to 2.3% in March, down from 2.8% the previous month. The group noted that many of its forecast’s base assumptions, including the impact of the Russia-Ukraine war on the global economy, represent substantial downside risks to both the macroeconomic and housing outlooks.
“Housing is currently acting as support to an otherwise slowing economy, although it is adding significantly to inflation,” said Duncan. “Even as interest rates are rising and reducing affordability, demographics are still strong supports for demand, and the paucity of existing home supply is supporting new construction and sales. The degree to which monetary ease is capitalized into home values suggests increased risk as rates rise, but this may be offset by some evidence that housing is an intermediate-term hedge against inflation.”
According to the ESR group, the 30-year fixed-rate mortgage will likely hover around 3.8% in 2022 and 3.9% in 2023. Fannie Mae also lowered its housing outlook and now expects total home sales to fall 4.1% in 2022, compared to the 2.4% downturn forecasted in February.
“We expect home purchase loan volume to hold up reasonably well but refinance activity to fall off considerably over our forecast horizon, perhaps totaling only a third of originations, unless there is a drop in mortgage rates, which we do not expect. Nonetheless, from a historical perspective, mortgage rates around 4% for fixed-rate loans is still a consumer-friendly rate for a home purchase,” Duncan said.
