Economic research

FOMC continues to tighten with another 75 basis point rate hike

What the July Fed statement says:

The Fed voted unanimously to raise its benchmark short-term rate an additional 75 basis points in July, the fourth increase of this tightening cycle and the third higher than the quarter-point increase that was typical of previous tightening cycles. While some were expecting a full percentage point increase, like inflation continues to beat expectations, the Fed didn’t go that far today. Still, the Fed continues to hammer home its commitment to move short-term rates to the range needed to reduce inflation, meaning more rate hikes are likely to come.

How Fed Policy Affects the Economy:

Fed rate hikes dampen demand by making borrowing more expensive. This impacts consumers and businesses that take out loans to make purchases and has an outsized impact on economic sectors that are more dependent on borrowing, such as housing and autos. Since the vast majority of homebuyers take out a mortgage to buy a home, they are feeling the impact of Fed rate hikes the hardest. The Fed does not set mortgage rates directly, but its actions influence the cost of borrowing to buy a home. Already, mortgage rates have jumped more than 2.5 percentage points in 2022, dramatically changing the affordability calculus for buyers at a time when record house prices also continue to increase the cost of entry for buyers. In fact, since last week, the the mortgage payment on the typical home for sale is up nearly 60% from a year agofar exceeding headline inflation of around 9%. Rents are also rising faster than other pricesup 14.1% from a year ago in June.

What awaits us? Uncertainty: The Fed will remain dependent on data

Key questions following today’s meeting include, how much is needed, and when might the economy start to see the effect of rate increases? Since the Fed will not be releasing updated economic projections today, answers to these questions will come only from the statement as well as comments from Chairman Powell. The July Statement reiterated the Committee’s expectation that “continued increases in the target range will be appropriate” and that the Fed is “strongly committed” to bringing inflation back in line with its 2% target. And during his press conference, Chairman Powell noted the extraordinary uncertainty ahead and the need for the Fed to monitor and react to incoming data.

What the Fed statement means for owners, buyers and sellers:

For consumers, this means that unless the economy shows further signs of tipping into a recession, mortgage rates are expected to rise, which will dampen housing demand. In fact, June saw declines in new home sales, Sales of existing housesand the most forward-looking pending home sales. Amid slowing demand and rising costs, there are bright spots for home buyers. The number of homes for sale continues to grow, registering 18.7% more than a year ago in June and continue this trend in weekly data. Although the options are more expensive and more expensive to finance, their growing number will help the real estate market rebalance, giving potential buyers some much-needed refreshment.

Danielle HaleDanielle Hale