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Fed Fights Inflation With Fifth Rate Hike of 2022

Overview: The Federal Reserve announced the anticipated massive rate hike on Wednesday and maintained its aggressive tone in fighting inflation. As a result, mortgage rates ended the week at the highest levels in over a decade.


Investors were not surprised by the Fed’s 75 basis-point increase in the federal funds rate, and they were far more interested in the latest forecasts. Officials on average now project that the federal funds rate will reach a peak of 4.6% next year (far above their last forecasts just three months ago) and will remain at that level for a while. This was slightly above the peak rate priced in by investors prior to the meeting. In addition, officials forecast that inflation will remain above 5% this year and will decline to the target level of 2% by 2025. The upward movement in mortgage rates took place ahead of the meeting in anticipation of the hawkish stance, and the actual event had relatively little lasting impact.

Higher mortgage rates have continued to restrain housing market activity. Sales of existing homes fell for the seventh straight month in August to the lowest level since 2015 (excluding a brief period near the start of the pandemic) and were 20% lower than last year at this time. Inventory levels were unchanged from a year ago, at just a 3.2-month supply nationally. The median existing-home price was 8% higher than a year ago at $389,500. Additional housing inventory has been badly needed for a long time in many regions, but the latest report on new home construction contained mixed news. In August, overall housing starts unexpectedly climbed 12% from July, but this was almost entirely due to strength in multi-family units. Starts of single-family units remained near the weakest levels in over two years. In addition, applications to build dropped to the lowest reading since June 2020.

Consumer spending accounts for over two-thirds of U.S. economic activity, making it an important measure of the health of the economy. In August, retail sales rose 0.3% from July, above the consensus forecast for a slight decline. While the dollar value of gas sales fell due to lower gas prices, consumers used their savings to purchase other items. Of note, sales are not adjusted for inflation, so some of the increase this month was simply due to higher prices.


Existing-Home Sales (millions)


Week Ahead

September 27 — New-Home Sales report

Consumer Confidence Index

September 30 — Core Personal Consumption Expenditures (PCE) Price Index


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