The Federal Reserve stepped up its fight against inflation by launching the biggest interest rate hike since 1994 and said it would do its best to tame rising prices and lower the cost of gasoline and food.

The United States central bank agreed to a 0.75 percentage point rate hike at its two-day policy meeting that concluded on Wednesday and expects a further increase in the target range would be appropriate. Short-term borrowing costs are currently in the target range of 1.50% to 1.75%.

On Wednesday, the Fed released a statement indicating that Russia’s invasion of Ukraine is causing enormous human and economic hardship and that the Federal Open Market Committee is very sensitive to inflationary risks.

Federal Reserve Chairman Jerome Powell told a press conference that the war and related events are putting additional upward pressure on inflation and affecting global economic activity. “In addition, Covid-related lockdowns in China are likely to exacerbate supply chain disruptions,” he explained.

The average 30-year fixed-rate mortgage rate rose 55 basis points from 5.23% to 5.78% in the week ending Thursday, June 16, 2022, according to the latest data released by Freddie Mac.

To put this figure into perspective, Jacob Channel, Senior Economist at LendingTree, said: A $300,000, 30-year, 5.23% fixed-rate mortgage typically costs the borrower about $1,653 per month, excluding other costs such as taxes and insurance. “The same loan would cost the borrower $1,756 at today’s new average rate of 5.78%,” he said. “That’s an additional $103 per month, $1,236 per year, and $37,080 over the life of the loan.”

The channel said it’s possible that the rate hike could be something of an over-correction on the part of lenders, and as a result, it could come down somewhat in the coming weeks as lenders adjust to the current high-inflation environment.

“With that said, mortgage rates have already risen significantly higher and faster than most predicted at the start of the year, and as the latest data shows today, lenders have shown a willingness to keep raising rates even in the face of demand from homebuyers. falling, he said. “So while we may see some rate cuts and cuts in the coming weeks and months, it is entirely possible that by the end of the year rates will still be higher than they are today.”

But the Channel said that the rise in rates is not only bad news. “Less demand for housing could help mitigate some of the housing supply problems that are being felt across the country,” he explained. “While it is unlikely that home prices will fall significantly, an increase in the supply of housing is likely to significantly slow home price growth and provide potential buyers with more housing options to choose from.”

Census data on new residential construction showed housing starts fell 14.4% from April and 3.5% from May 2021, to 1.55 million.

In a very competitive housing market this spring, Zillow economic analyst Dan Handy said builders continued to keep housing completion rates above levels not seen in the decade before 2020.

“While in the face of a rapid rise in interest rates and the resulting cooling in consumer demand, some developers may start to backtrack on their plans due to a second month in a row of lower permits, a drop much sharper than the consensus. he said. “Builders are expressing pessimism about the state of the housing market, noting the lowest level of confidence in future sales since the start of the pandemic.”

Holden Lewis, an expert in home and mortgage lending at personal finance platform NerdWallet, said 30-year fixed-rate mortgages rose 6% over the past week, the highest level since November 2008, when the economy was crawling out of the financial crisis.

“The May inflation report was the latest push that pushed mortgage rates above 6%,” he said. “Annual inflation unexpectedly accelerated to 8.6% in May, and mortgage rates will have little reason to lower as long as inflation remains high.”

Lewis said the Federal Reserve raised short-term rates by a solid 0.75% on Tuesday to slow economic growth and bring inflation under control.

“Mortgage rates tend to rise and fall in anticipation of Fed rate changes, which is a way of saying that the Fed hike is already priced into mortgage rates,” he said. “In other words, mortgage rates are more likely to rise or fall before Fed meetings than after Fed meetings. Over the next week or two, we probably won’t see the big move in mortgage rates that we did last week.”

“House sales are slowing sharply due to skyrocketing mortgage rates,” Lewis added. “Declining demand means that we will soon see a slowdown in house prices. This indicates that the Fed’s monetary policy is working. Housing costs are a major driver of the CPI and a slowdown in home prices will eventually be reflected in the inflation report.”

But David Dworkin, president and CEO of the National Housing Conference, said higher mortgage rates are not a sustainable way to drive down home values.

“Today’s decision by the Federal Reserve to raise the discount rate by 75 basis points will significantly increase the cost of home ownership for millions of Americans,” he said. “The Fed has no choice but to raise rates to fight inflation. Raising mortgage rates is a necessary but bitter pill to take. However, without action to address the housing shortage, higher interest rates will only hurt low- and middle-income families without having a significant impact on house price inflation.”

“Higher rates will do nothing to address the key driver of housing inflation: persistent and long-term housing shortages,” Dvorkin added. “As Chairman Powell noted in his comments, while the number of unfinished homes is high, the number of completed homes is still incredibly low, historically low.”

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