Balancing inflation the Fed’s focus as rates creep up
Strong earnings reports and a better than expected report on jobless claims pushed the 10-year Treasury note yield higher over the last week with investors hoping these are signals of an improving economy. The 10-year note yield rose to 1.67%—a gain of 4.3 basis points (1 basis point is equal to 0.01%). Mortgage rates, as is typical, climbed in tandem with the 10-year note yield. The Freddie Mac 30-year fixed-rate mortgage average went up to 3.09% in the latest survey. Keep in mind, this survey is a weekly average across many lenders and may not necessarily reflect the rate you will be quoted by your mortgage loan officer.
While 3.09% on average is still an incredibly low interest rate historically, it is the beginning of what many investors have expected for quite some time—rising rates as the Federal Reserve begins to ease pandemic-era monetary policy.
The big question the Fed is still dealing with is inflation. For months, Fed Chairman Jerome Powell along with the Federal Open Market Committee (FOMC) have reiterated that they believe the current inflation we are seeing is transitory, meaning a temporary side effect of the pandemic recovery. However, this past week Fed Governor Christopher Waller said policy makers may need to move toward "a more aggressive policy response" if inflation keeps rising at its current pace. In September, the inflation rate was just above 3%.
As a quick recap of how we got to this point, let's go back to March 2020, the onset of the pandemic. The Fed immediately lowered the overnight lending rate, the interest rate banks pay to borrow money, to 0%. It also started purchasing $120 billion per month worth of Treasury bonds and mortgage-backed securities. The 10-year note yield dropped well below 1.0%, and flirted with going negative. Mortgage interest rates started declining a few months later.
In August 2020, Powell outlined the Fed's inflation policy and said it would allow inflation to run hot, meaning above the 2% goal, temporarily. This decision was meant to support labor as well as broader economic growth. The Fed and the FOMC are still hesitant to raise the benchmark overnight lending rate until there is more stability in the economy. Just a few months ago, the Fed said it would like to see two strong months of jobs reports from the Labor Department before laying out its timeline for hiking rates and tapering bond purchases. However, both the August and September jobs reports were abysmal.
For now, the Fed has only discussed a somewhat clear timeline for tapering its bond purchases. That will potentially begin mid-November and will likely continue to spur the rise in mortgage interest rates. As of it's latest policy meeting, FOMC members predict the Fed will start to raise interest rates (overnight lending rates) at the end of 2022 at the earliest.
So what does all of this mean for housing? Well, as a homeowner or a potential homebuyer you've seen inflation first-hand. It is more expensive to build homes because of labor shortages and the cost of materials leading to a lack of replenished supply. It's more expensive to buy homes because of a lack of supply and high demand. Analysts from Freddie Mac say despite these challenges, they "expect the housing market to remain strong as we head into the end of the year."
