The probability of the Fed raising the federal funds rate by three quarters of a percentage point (75 basis points) this afternoon has jumped from under 10 percent last week to over 95 percent today, based on an analysis of the futures market. As such, the benchmark 30-year mortgage rate, which has already rocketed by over 200 basis points in under 6 months to a 12-year high, is not only poised to climb but to spike again.
As we foreshadowed at the end of last year, higher mortgage rates are translating into less purchasing power for buyers, fewer sales and downward pressure on home values.
And on top of today’s projected rate hike, the probability of the Federal Reserve raising interest rates by an additional two (2) full percentage points by the end of the year is nearing 95 percent as well. We’ll keep you posted and plugged-in.
UPDATE: As projected, the Fed voted to raise the federal funds rate by three quarters of a point, representing the first 75 basis point hike in nearly 30 years.
Jerome “better late than never” Powell
Well, before anybody points it out for me, Bloomberg is reporting that in fact, The Fed will Hikes Rates 75 Basis Points, which I said the other day they wouldn’t do. I guess “data driven” means the FOMC uses the futures market as a source of data. Anyway, I was wrong.
The news conference begins at 2:30pm EDT.
UPDATE: As projected, the Fed voted to raise the federal funds rate by three quarters of a point, representing the first 75 basis point hike in nearly 30 years.
The Fed should have raised the rate by 100 basis points. None the less this is good news.
Don’t interest rates need to be higher than inflation rate to actually make a difference? How long until we’re at 10%?
IIRC, one of the reporters at the press conference asked a version of this question and Powell essentially answered No. Financial conditions are already tightening significantly with just the small amount of rate hiking that The Fed has implemented and there’s a negative multiplier effect that has already started to kick in.
The latest mortgage rate surge was the largest single week increase since 1987. In May, housing starts declined 14.4 percent below the revised April estimate. That is huge difference.
I’d actually appreciate an economist’s explanation of why rates should go up at all. Inflation isn’t being driving by white-hot consumer demand, it’s being driving by supply-side constraints (oil, chips, shipping, etc.). Raising interest rates won’t affect the supply-side constraints at all; they’ll just hurt ordinary people and tip the economy into recession (further hurting people).
They are raising them because they need to have room to cut in the recession (which we are currently in). They are out of position having kept rates so low for way too long and have painted themselves into a corner.
That’s rather tortured logic – that’s like asking someone why they’re gorging on food, and their response is “Because I want to diet next year”…
Your answer is buried inside your question: if you have constrained supply, then you need to constrain demand; no you won’t not buy a loaf of bread, but if you half to pay more dollars to finance a washer, you may put that purchase off.
But the problem with that, as Krugman has regularly pointed out, is that the rate increase is a blunt instrument that doesn’t affect what the ordinary person sees as inflation (and that therefore affects their personal economic outlook) – bread, in your example, or gasoline … the demand-side constraint on gasoline purchases is the cost of gasoline, not interest rates.
Agree that increases in the federal funds rate is a pretty blunt instrument.
But, for example, shelter is the single biggest component of CPI (33% of the Index), and while The Fed doesn’t use CPI as it’s preferred inflation measure, the ordinary person certainly takes shelter costs increases as evidence for inflation.
Perhaps higher interest rates will constrain the amount of speculation and flipping in the local property market and slow down people buying rent controlled buildings, turning out the tenants and then advertising the units on AirBnB.
… or the wealthy, who will buy with cash or little debt, will continue to do so while those who might have leveraged their way into the market cannot. Similarly the wealthy can now buy vacation homes at a reduced cost, while ordinary Joes are hindered in meeting their basic housing needs.
If interest rates go up, it will slow an overheated housing market – I think no question the fed should’ve raised rates earlier before the 2008 crisis, to dampen that bubble. But if someone needs to sell, to move to get a new job, etc., rising rates impede that otherwise-desirable liquidity and behavior. So Jane Doe can’t sell her house, and therefore can’t maximize her personal economic position – but again, that has zero impact on supply-side constraints such as computer chips and crude oil.
From today’s Politico: “[Federal Reserve Chair] Powell told the Senate Banking Committee on Wednesday he doesn’t expect gas or grocery prices to go down as a result of the Fed’s campaign of rate hikes, which are designed to dampen spending but can’t help fix insufficient supply.”
I feel a bit vindicated, though it’s a hollow victory for the struggling working class.
“If interest rates go up, it will slow an overheated housing market”
This in itself is a huge demand driver. In a hotter housing market people tend to buy bigger houses, often going out to suburbs exurbs. Bigger houses use more energy and longer commutes use more energy. Bigger houses need to be furnished and the wealth effect of rising house prices tends to make people more sprendthrift. And as “curious” points out above, real mortgage rates are still negative. Housing is a huge demand driver and to really cool housing you need interest rates above the inflation rate.
Secondly, inflation does cause supply problems and conversely fixing inflation can help fix supply problems. If you print money and mail out checks to people then they may be reluctant to work and/or require a higher reserve wage to come out of unemployment. This can create what appears to be a labor shortage. Monetary uncertainty causes businesses to reduce their risk tolerance and make them less likely to do things such as hiring or making capitol expenditures to bring more supply online.
You could probably get as many explanations as you could find economists. But IMHO a classic and very useful point of view is that of Milton Friedman.
““Inflation is always and everywhere a monetary phenomenon.” Monetary economist Milton Friedman made this line famous after stating it in a talk he gave in India in 1963. In a trivial sense, of course, the statement is true. Inflation, by definition, means that money loses its purchasing power and, therefore, is a monetary phenomenon. But Friedman meant much more. After having defined inflation, in that same talk, as a “steady and sustained rise in prices,” Friedman argued that one could not find inflation anywhere in the world that was not caused by a prior increase in the supply of money or in the growth rate of the supply of money. His statement was an empirical one, not a logically necessary one, and most professional economists, still in the thrall of John Maynard Keynes, did not agree with Friedman. But within a decade, the evidence from the United States and other countries had convinced most economists that Friedman was right.”
https://www.hoover.org/research/inflation-true-and-false
You can probably find much more in Friedman’s own words
A key pragmatic difference between localized price increases due to supply constraints and broad inflation is that localized supply problems tend to be self healing. Higher costs for a particular item drive suppliers to increase production and/or consumers to reduce demand or look for substitutes. Both of which tend to drive costs back down.
With broad inflation there’s nowhere to hide, if producer prices have gone up then building a new plant, retooling for more efficiency and hiring more workers are all more expensive so it may not be profitable to increase production. Wage inflation can make consumers reluctant to cut demand and prices of substitutes may have gone up as well.
In fact there are many mechanisms that seem to make inflation self-reinforcing. As inflation can cause people to set their future inflation expectations higher, which can cause workers to hold out for higher future wages and cause producers to set prices higher since they expect their costs to rise (or to cut production as they perceive future profitability to be cut)
Here’s a video of Friedman talking on inflation. There are other points of view of course, but it’s interesting to go back and look at some of the conversations on inflation during the 70’s. You could replace OPEC/Greedy Sheiks with Putin’s Oil War and see a lot of parallels to current times.