The Federal Reserve (Fed) on Wednesday raised the federal funds rate by another 75 basis points, to 3%-3.25%, bringing it back to a level last seen in March 2008.

The decision was expected by most Fed observers, and comes as mortgage lenders and real estate brokerages struggle to adjust to a Fed-driven slowdown to the housing market. 

Since the Fed has started a tightening monetary policy to slow inflation, it has resulted in a cumulative 300 bps hike: 25 bps in March, 50 bps in May and three 75 bps increases in June, July and September.

Inflationary pressures resulted from the decision to maintain rates at 0%-0.25% between March 2020 and March 2022 to stimulate economic activity during the COVID-19 pandemic, marking a period of easy money that gave rise to the hottest mortgage market in U.S. history. 

Consequently, inflation in the U.S. hit 8.3% in August, down from 8.5% in July but still higher than the 8.1% expected by observers, the Bureau of Labor Statistics reported on Sept. 13. One of the primary drivers has been housing costs, with shelter costs accounting for about 25% of inflation in August. Shelter costs rose 6.2% in August from a year before, and were up from 5.7% in July.

That inflation came in hot raised the specter that the Fed would increase the benchmark rate by 75 or even 100 bps today.

In the housing market, the tightening monetary policy has brought mortgage rates to the mid-6% level and taken some of the sting out of new lease prices, according to firms that track the rental market. Existing-home sales declined in August for the seventh consecutive month and home prices dropped sequentially from July.

According to the Fed’s latest Beige Book report, home sales fell across all 12 Fed districts and the prospects for future improvement anytime soon are dim as well. “The outlook for future economic growth remained generally weak, with … expectations for further softening of demand over the next six to 12 months,” the report states.

Rate hikes also impact real estate investors. “Debt is becoming very expensive very quickly,” said Veena Jetti, founder of the Dallas-based real estate investment firm Vive Funds. “We will likely see operators that bought in the last few years without interest rate insurance finding it tough to service the debt.”

The post Fed hikes rates by 75 bps to rein in still-hot inflation appeared first on HousingWire.



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