The Federal Reserve, in its century-long establishment, has been a significant player in setting the mood of the stock market and market prices.
As the country battles with inflation this year, the Central Bank has been prompt in its caution that the economy will tighten. And unfortunately, a tight economy means the Feds will try to take steps to ease the economic conditions. The pandemic has unequivocally affected the world and created dismal economic dynamics, marred with fewer available jobs, lower wages, a tight labor market, and high commodity prices. For instance, the Feds had to increase interest rates to ease the market, and with it was the fluctuation of mortgage rates.
“I think they know they gambled and lost and have to do something serious to get inflation back under control. I fear that they took a gamble that inflation wasn’t too real at the beginning of 2021,” said Notre Dame University economics professor Jeffrey Campbell.
The Feds have been stricter with their policies, often characterized by an aggressive approach to economic factors. According to Jerome Powell, the Feds Chairman, he will continue the aggressive policies so long as it counters inflation that affects the United States.
“Their message is that we should expect them to remain in restrictive policy mode even after we start to see inflation data head in the right direction. So he went to pretty extensive lengths to dispel assumptions of any pivot coming forward soon,” said Keith Buchanan, Globalt Investments portfolio manager.
“It would be sufficient for them to acknowledge that the near-term rate is trending in the right direction, but, definitely, they should not allow that to [influence] their trajectory. The real dilemma is, how much good data do they need in hand before they pause?” said Brad Conger, a deputy chief investment officer from Hirtle Callaghan.
“Given current rates of inflation, I believe that the Fed has more work to do in order to get inflation under control. This will entail further rate increases to tighten financial conditions,” added Cleveland Federal Reserve Bank President Loretta Mester.
“Our responsibility to deliver price stability is unconditional. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said.
“The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” the Chairman added.
Read Also: House Sales were down in November
Feds affecting the mortgage rates
Fortunately, mortgage rates have been dropping in recent months. So naturally, demand for mortgage applications has increased. However, as the prices are still relatively higher year-over-year, many buyers still feel they need to wait for the economy to ease—the hesitance among buyers pressures many home sellers and home builders. Home building rates in the US slowed down in November. So the Feds had to do something.
“The ongoing moderation in home-price growth, along with further declines in mortgage rates, may encourage more buyers to return to the market in the coming months,” said MBA economist Joel Kan.
“A friendly enough Fed could easily break the range, but we have doubts about how much fuel the Fed will want to add to the fire. If anything, the Fed is more likely to try to temper the exuberance. Because the exuberance is counterproductive to the Fed’s goals,” added Matthew Graham, Mortgage Daily News chief operating officer.
“There are some very, very modest green shoots over the last few weeks, as rates have come down, but I am not ready to get sucked back into the conversation we had in August when we felt better,” said the CEO of Toll Brothers, Doug Yearley.
“There have been a handful of pieces of relatively good news for the housing market lately, but we’re far from out of the woods. Key indicators of homebuying demand will likely be teetering on a knife’s edge with every data release that comes out related to the Fed’s path to eventually bringing rates down,” added economist Taylor Marr from Redfin.
Home building has decreased
Because of fluctuating rates imposed by the Feds, home builders’ mood has been low. In November, the rates of homes built went down. While the inventory of homes in the market is higher than last year, the prices are still high. This means that many buyers will resort to postponing their purchases.
“In essence, the residential real estate market was frozen in November, resembling the sales activity seen during the Covid-19 economic lockdowns in 2020,” NAR chief economist Lawrence Yun said.
“The principal factor was the rapid increase in mortgage rates, which hurt housing affordability and reduced incentives for homeowners to list their homes. Plus, available housing inventory remains near historic lows,” he added.
“We have seen home prices come down from their summer peaks over the past five months. But, at the same time, we have also seen rent growth retreat for ten consecutive months,” added George Ratiu from Realtor.com.
“However, the cost of real estate remains challenging for many households looking for a place to call home, especially as high inflation and still-elevated interest rates have been eroding purchasing power,” he added.