The Federal Reserve made a big move to try and stifle inflation by raising the federal funds rate by .75% (or 75 basis points). It was the biggest rate hike in nearly three decades and Fed Chair Jerome Powell indicated that the Federal Open Market Committee is open to another 75 basis point increase in July.
The markets went on a wild ride leading up to the Fed’s decision with the 10-year Treasury note yield climbing just over 3.48%—its highest level in 11 years. Mortgage interest rates typically follow the 10-year note yield and this was no exception. Rates jumped well above 6% as the markets absorbed the news of the Fed’s probable decision.
The day after the Fed’s announcement saw another wild swing with the Dow opening Thursday morning down more than 700 points off of Wednesday’s brief rally. The Fed’s increase coincided with the Bank of England’s fifth-straight interest rate increase which contributed to the drop in U.S. Markets as the world gets more aggressive in fighting global inflationary pressures.
The decision by the Fed was largely influenced by the consumer price index (CPI) and the producer price index (PPI) which are both released by the Bureau of Labor Statistics. Both data points came in extremely high with the CPI showing its highest annual increase since Dec. 1981 (8.6%) and the PPI (10.8%) getting close to March 2022’s record year-over-year high of 11.5%.
The Fed’s preferred inflation gauge is the core CPI which excludes more volatile readings like energy and food. But the Fed also watches the PPI, which measures the wholesale price paid by manufacturers of goods, to predict future consumer price increases.
This is always a good time to mention that the Fed does NOT raise mortgage interest rates. The Fed controls the federal funds rate, also called the overnight lending rate, which is the interest rate that banks pay to borrow money. Effectively what the Fed is doing is trying to limit the supply of money in the economy to make the dollar more valuable and drive down inflation.
MORTGAGE MARKETS TAKE A HIT
This past week was impactful for the mortgage industry. Rates spiked ahead of the Fed’s announcement, adding to an already volatile marketplace. Freddie Mac’s 30-year fixed-rate mortgage average for the week came in at 5.78%.
In their weekly release, Freddie Mac’s economists said, “Mortgage rates surged as the 30-year fixed-rate mortgage moved up more than half a percentage point, marking the largest one-week increase in our survey since 1987. These higher rates are the result of a shift in expectations about inflation and the course of monetary policy. Higher mortgage rates will lead to moderation from the blistering pace of housing activity that we have experienced coming out of the pandemic, ultimately resulting in a more balanced housing market.”
For the sixth straight month we are seeing a drop in homebuilder sentiment. Anything above 50 is considered positive and June’s National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index fell 2 points to 67. That may still seem strong but consider that the index was at 90 at the end of 2020. The index is made up of 3 pieces including buyer traffic, current sales conditions and sales expectations. June’s index shows buyer traffic dropping into negative territory (48 points) for the first time since June 2020.