On Dec. 15, the Federal Reserve Board signaled it will be shifting from an accommodative monetary policy stance that supported the economic rebound from the 2020 recession toward a tighter policy as a direct result of ongoing inflation.
For the Chattanooga area, this policy pivot means mortgage interest rates are likely to rise in 2022. This will reduce housing affordability and again emphasizes the need for policymakers to enact solutions to fix the nation’s supply chains that are impeding local construction.
At the conclusion of its December policy meeting, the Federal Reserve announced changes to its outlook and projections in response to increased inflation data and inflation expectations that will yield higher interest rates in 2022 because of tighter monetary policy.
The announcement makes several changes to both the Federal Reserve’s economic outlook and its implied monetary policy path:
Acceleration of tapering of purchases of mortgage-backed securities and Treasurys
The central bank will double the pace of tapering with an anticipated conclusion of bond purchases in March 2022.
Retirement of transitory inflation expectations
The Fed’s outlook notes that supply-demand imbalances are contributing to elevated levels of inflation.
Moreover, the Fed’s economic projections increased its estimate for 2021 inflation (under the core PCE measure) from 3.7% to 4.4%.
As an indication that inflation will persist well into 2022, the projection for inflation next year increased from 2.3% to 2.7%.
Higher interest rates sooner
The Fed did not announce a change in the federal funds target rate. However, its outlook suggests three 25 basis point rate hikes in 2022 and three more in 2023.
This implied tightening is consistent with the NAHB’s existing forecast of a 2% 10-year Treasury rate near the end of 2022.
This higher rate also implies the 30-year mortgage rate rising somewhat higher than 3.6% by the end of next year.
For the latest information on the housing market, as well as a full list of our local industry professional members, visit the Home Builders Association of Greater Chattanooga’s website at www.HBAGC.net.