Fed Chairman Jerome Powell hinted Wednesday that the U.S. central bank is looking to dial back the pace of interest rate hikes as soon as the impact of previous increases shows up in inflation data.

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In a move that could take some pressure off of mortgage rates, Federal Reserve policymakers voted Wednesday to raise short-term interest rates by the same amount as they did last month, instead of taking even more drastic measures to fight inflation.

The 75 basis-point increase in the short-term federal funds rate approved last month was the biggest rate increase since 1994. But because there are signs that inflation continues to rage unchecked, some analysts had speculated that the Fed might make an even more aggressive move in July, and approve a full 1 percentage point rate hike.

By sticking with another 75-basis-point increase that was already priced in by bond market investors, the Fed has staked out a middle ground that’s designed to communicate that policymakers are still concerned about inflation, but don’t want to slam the brakes too hard on economic growth.

Marty Green, of law firm Polunsky Beitel Green, said some of his firm’s mortgage lending clients are anticipating “a slight improvement in mortgage interest rates in response to the Fed’s actions, particularly after the recent speculation that the Fed might raise rates in July a full percentage point.”

Rates on 10-year Treasury bonds — a good indicator of where mortgage rates could be headed next — fell below 2.75 percent after the Fed’s announcement, down from a 52-week high of 3.48 percent on June 14.

Mike Fratantoni, chief economist for the Mortgage Bankers Association, noted that mortgage rates have already dropped about half a percentage point in recent weeks, heading closer to 5.5 percent than the 6 percent rates seen in June.

“There is a tug-of-war in market expectations, between the persistently high inflation numbers and resulting rapid Fed hikes, and the increasing risk of a sharp slowdown and possible recession,” Fratantoni said in a statement provided to Inman. “As a result, mortgage rates may have already peaked and could stay between 5 percent and 5.5 percent through the remainder of 2022. If that were to be the case, potential buyers, who had been scared off by the rate spike, might find their way back to the housing market.”

Mortgage rates ease


Since more than doubling from historic, pandemic-induced lows, rates for 30-year fixed-rate loans have eased somewhat from a 2022 high of 6.06 percent registered June 14 by the Optimal Blue Mortgage Market Indices.

Despite that, demand for purchase mortgages was down 18 percent last week when compared to a year ago, according to a weekly survey by the Mortgage Bankers Association (MBA).

“The question is whether the slowdown is a result of most consumers simply pausing a purchase decision while they see where interest rates and home prices settle or whether they are having to delay a purchase decision indefinitely because of affordability concerns,” Green said in a statement to Inman.

In a statement on their unanimous decision to raise the federal funds rate by 75 basis points, Fed policymakers said they remain “strongly committed to returning inflation to its 2 percent objective.”

At a press conference following the conclusion of the meeting, Fed Chairman Jerome Powell hinted that the central bank is looking to dial back the pace of interest rate hikes as soon as the impact of previous increases shows up in inflation data.

“Over coming months, we’ll be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent,” Powell said. “We anticipate that ongoing increases in target range increases for the federal funds rate will be appropriate. The pace of those increases will continue to depend on the incoming data and evolving outlook for the economy.”

“Today’s increase in the target range is the second 75 basis-point increase in as many meetings. While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then. We will continue to make our decisions meeting by meeting, and communicate our thinking as clearly as possible. As the stance of monetary policy tightens further, it’ll become appropriate to slow the pace of increases while we assess how cumulative policy adjustments are affecting the economy and inflation.”

In addition to raising its target for the short-term federal funds rate a range of 2.25 to 2.5 percent, Fed policymakers say they’ll continue to trim the Fed’s massive balance sheet of government debt and mortgage-backed securities, much of which was taken on early in the pandemic to stimulate the economy by keeping interest rates low.

The Fed’s $9 trillion balance sheet


Assets held by the Federal Reserve through quantitative easing purchases now include $5.73 trillion in long-term Treasurys and $2.73 trillion in mortgage-backed securities. Source: Board of Governors of the Federal Reserve System, Federal Reserve Bank of St. Louis.

During much of the pandemic, the Fed drove down long-term interest rates to historic lows by increasing its holdings of Treasurys by $80 billion a month and growing its mortgage-backed securities portfolio by $40 billion a month.

Last month, the Fed began reducing its more than $2 trillion in mortgage investments by letting up to $17.5 billion maturing assets roll off its books each month. The plan is to gradually increase the size of those roll-offs over three months, to $35 billion a month. The caps for Treasurys rolloffs will be higher — $30 billion a month at first, increasing to $60 billion a month after three months.

“The elephant in the room remains whether the Fed will engage in active sales of MBS [mortgage-backed securities] to achieve its desired balance sheet reduction, though the minutes from this meeting will reveal FOMC members’ thoughts on the matter,” said Phil Rasori, chief operating officer at capital markets advisory firm MCT, in a statement provided to Inman.

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Email Matt Carter

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