The next hike could come as early as June
The Federal Reserve hiked interest rates by half a percentage point on Wednesday, marking the sharpest increase since 2000. Although it didn’t surprise experts, they are now warning the public of continued market volatility ahead.
Mike Fratantoni, senior vice president and chief economist at the MBA, said the organization believes that the fed funds target will reach the neutral rate of 2.5% by the end of 2022. Reaching this equilibrium will neither boost nor restrain the economy.
“This change had been telegraphed clearly in recent speeches. The statement repeated the language that the committee ‘anticipates that ongoing increases in the target range will be appropriate’,” Fratantoni said. “In other words, we are far from done at this point.”
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Following this is the Fed’s decision to shrink its unprecedented $9 trillion balance sheet to tighten credit. How long this short-term rate will go on is still up for speculation. Diane Swonk, chief economist at Grant Thornton, likened the move to driving in reverse: “They just don’t know what obstacles they’re going to hit.”
Fratantoni shared a similar sentiment, saying this would leave investors in the dark and worsen the already volatile mortgage-backed security market (MBS).
“The runoff will ramp up over the course of three months, which should allow markets to absorb this excess supply,” Fratantoni said. “Importantly, neither the statement nor the balance sheet plan repeated the goal of returning the balance sheet to all Treasuries, and there was no mention about the potential for active MBS sales.”
“MBA is forecasting that mortgage rates are likely to plateau near current levels,” Fratantoni added. “The financial markets have attempted to price in the impact of Fed actions over this cycle, and they are likely also pricing in the economic slowdown that will result. Once we are past this rate spike and associated volatility, MBA expects that potential homebuyers may be more willing to re-enter the market. Given how much higher rates will remain above the past two years, we do not expect refinance demand to increase any time soon.”
The Fed is likely to carry out another rate increase at its next meeting in June.
