Market Perspective

Fed Tightens Monetary Policy With First Rate Hike in Four Years


Overview: Over the past week, shifting expectations for a resolution to the Ukraine conflict continued to cause daily volatility in mortgage markets, but the movements were mostly offsetting. However, rising inflation and the Federal Reserve’s planned response were negative, and mortgage rates ended the week at the highest levels since the middle of 2019.

 

On Wednesday, the Fed began its policy shift to help bring down inflation. As expected, the Fed raised the federal funds rate by 25 basis points, its first increase since 2018. The projections from officials revealed that they anticipate six additional rate hikes this year, which was at the high end of investor expectations, and a much more rapid pace than expected just a few months ago. The meeting statement contained little guidance on the plans for selling bonds to reduce the Fed’s massive holdings, merely saying that it will begin “at a coming meeting.” Mortgage rates moved higher following investors’ reactions to the Fed’s hawkish (in favor of tighter monetary policy) stance.


Since consumer spending accounts for over two-thirds of U.S. economic activity, it is an important indicator of the health of the economy. In February, retail sales increased 0.3% from January, which was slightly below the consensus forecast. However, the results for January were revised significantly higher to an amazing 4.9% monthly gain. Of note, spending at bars and restaurants rose 2.5% in February, as consumers were less inhibited by concerns about COVID.


The Consumer Price Index (CPI) is a closely watched inflation indicator that looks at price changes for a broad range of goods and services. Core CPI excludes the volatile food and energy components and provides a clearer picture of the longer-term trend. In February, core CPI was 6.4% higher than a year ago, up from an annual rate of increase of 6% last month, and the highest level since 1982. Shortages for many items have caused enormous cost increases, such as used car prices, which are 41% higher than a year ago. Investors are divided about how long it will take to clear up supply chain disruptions caused by the pandemic to increase inventories and help bring prices back down.

 

Retail Sales (% change)

 

Week Ahead


March 17 — New Residential Construction report (also known as Housing Starts)

March 18 — Existing-Home Sales report

March 23 — New-Home Sales report