The Federal Open Market Committee strongly hinted it would undertake its first, post-COVID increase of the federal funds rate in March at the conclusion of its January policy meeting. The activity comes in response to the highest inflation readings in nearly four decades, which have increased both consumer costs and business input costs.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run,” the Committee wrote in its policy announcement. “In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0-¼%. With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”
In an Eye on Housing post, NAHB chief economist Rob Dietz says housing market stakeholders should be prepared for four 25 basis point federal funds rate increases over the course of 2022.
“It is important to note that there is not a direct connection between federal fund rate hikes and changes in long-term interest rates,” Dietz writes. “Indeed, during the last tightening cycle, the federal funds target rate increased from November 2015 to November 2018, a 225-basis point expansion. However, during this time mortgage interest rates increased by a proportionally smaller amount, rising from approximately 3.9% to just under 4.9%.”
While there is not a direct correlation, Dietz says the policy pivot will result in higher interest rates in 2022. The change is projected to reduce housing affordability and “emphasizes the need for policymakers to enact solutions to fix the nation’s supply-chains,” according to Dietz.
