"Dear inflation, let's meet in the middle," one economist says in summarizing Fed's move
Reaction from across the mortgage industry poured in after the Federal Reserve on Wednesday raised interest rates by 0.75% -- the biggest increase it’s made in a single meeting in 28 years – in a continuing effort to stave off inflation. Reaction to the move was swift, especially given the central bank’s signaling that further rate increases are to come this year.
In a prepared statement, the Federal Reserve cited faster-than-expected growth of inflation for the hike. Raising rates has the effect of discouraging consumers from making large purchases, thereby compelling residents to pull back on their spending. The aim is to lower demand over time by allowing prices to come down and stabilize.
“Overall economic activity appears to have picked up after edging down in the first quarter,” the Fed said in a statement. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”
The bank cited factors that have led to hyperinflation: “The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.”
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Mortgage Professional America reached out to various mortgage industry players for reaction to the Fed’s move.
Responding to remarks made by Jerome H. Powell, chairman of the board of governors at the Federal Reserve System, First American chief economist Mark Fleming noted the announced increase was larger even than guidance given during the Federal Open Market Committee’s meeting in May. “The change in course is a consequence of accelerating inflation pressures, as CPI data showed an annual 8.6% increase in May, compared with 8.3% in April,” Fleming observed. “This is a recently unprecedented increase, but not all that surprising because the policy rate, as Chairman Powell just acknowledged in the Press conference, is still well below that magical neutral rate. The Fed is looking for inflation to start responding favorably to these rate increases. Essentially saying, ‘Dear inflation, let’s meet in the middle.’’’
Fleming noted another market the Fed seeks to impact with its most recent step on rates: “There’s one more market the Fed hopes to influence and ‘meet in the middle’ -- the labor market. The hope is to cool the labor market through fewer job openings, instead of less workers in jobs. Reducing labor market tightness by reducing the imbalance between job openings (labor demand) and filled jobs (new labor supply), which adds significance to the monthly JOLTS data as another data-driven leading indicator to watch closely.”
Melissa Cohn, regional vice president at William Raveis Mortgage and a 40-year industry veteran, pointed to early signs of hope that the Fed’s action will yield results in taming inflation. “The Fed raised rates by 0.75% -- and more importantly, Powell stated that they will continue to raise rates aggressively in their upcoming meetings,” she began. “He reiterated the Fed’s commitment to getting inflation back down to 2%. Bonds are rallying on the news and hopefully that rally will help to stop the crazy rise in rates that we have seen in the past week. Not sure that rates will drop much at all but if they stop going up-- the glass is half full.”
Michael Gifford, CEO of Splitero, also weighed in. The financial services company provides homeowners options to access home equity by offering lump sums of cash in exchange for a share of their home’s appreciation – so called “home equity investments” or HEIs.
Who would be the most affected by the interest rate hike? “I expect the rise in interest rates to most impact entry-level buyers, stretch or reach buyers that are pushing their limits and all homeowners looking to refinance or cash-out refinance,” Gifford said.
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He explained why the Fed’s rate hike will impact mortgage rates: “The Fed rate hike impacts mortgage rates because the banking institutions are charged higher fees by the Fed and pass those costs to consumers, primarily through mortgages. Alternative financing options, such as non-banking institutions, are unaffected. We are working with homeowners now that have canceled their refinances and HELOC applications due to significant pricing changes and long funding timeframes.”
He added that the rate hike will also have the effect of slowing down HELOC activity: “For years, HELOC activity has been declining, and rate hikes will only accelerate that trend,” Gifford said. “Banks originating HELOCs have slowly constrained their lending criteria and made the qualification process stricter. Income, debt-to-income ratios, and credit score requirements have increased dramatically from a few years ago. Alternative products have emerged to serve those that financial institutions are leaving behind. We allow homeowners to access their home equity in as little as 10-15 days without income or credit score requirements.”
He noted that rate increases yield yet another hurdle for those longing to achieve homeownership: “Predicting housing stock availability in your area, home prices, interest rates, borrowing qualifications, and physically moving is becoming harder and more uncertain. Unfortunately, homebuyers are facing headwinds on multiple fronts with little reprieve in sight.”
Josip Rupena, CEO of Milo, zeroed in on the inevitability of higher borrowing costs and mortgages for homeowners. The firm he heads offers loans that use bitcoin as collateral not unlike the way a homebuyer seeking traditional mortgages might offer investment accounts, savings or other property.
“It will increase mortgage payments, and borrowers may need to put larger down payments to offset the higher monthly payments to stay within their monthly payment budget,” Rupena said of the Fed’s action.
In its statement, the Fed did point to strong pockets of the economy, notwithstanding inflation: “Overall economic activity appears to have picked up after edging down in the first quarter,” the central bank’s statement reads. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”
