The Fed Strikes Back

Inflation is down, interest rates are down, the stock market's been going up, and enters the Fed; The Empire Strikes Back. The Fed's at it again, they've raised the overnight rates to a target range of between 4.25% to 4.5%, which is down from the previous increases. They've been raising them by .75% for the last four meetings, this is the seventh time the Fed has raised rates in 2022.

The Fed’s Goal

We are still in unprecedented times with the Fed's interest rate moves. On top of raising rates, the Fed also offered guidance that their new target rate is between the 5% to 5.25% rate, which is still another .75% from where we're at today. That's about half a point higher than the Fed had previously predicted and much higher than they gave guidance to earlier this year.

Most Fed economists are now saying increases are likely to continue throughout 2023 with interest rate decreases not happening until 2024 with a target rate of 4.1% in that 2024 timeframe. So why is the Fed doing this?

They're doing this because their inflation goal is 2% and the numbers just came in at 7.1%. They're a little bit at odds with the general market. The market took 7.1% as a good sign because it's down drastically from the previous month where it was at 7.6% and down 2% from back in June, where it was 9.1%. So the thinking on Wall Street is that we're making good progress with a 2% decline in five months.

A lot of these rate hikes take time to have an effect on the marketplace and so the Fed's not really giving the time for the market to react and the market's already come down 2%. There's a lot of fear out there that the Fed is overreacting and being too bullish with their rate hikes and may slow down the economy too much.

The Fed’s Predictions and What to Expect

The Fed also offered guidance that they're predicting a .5% GDP growth in 2023, which is just slightly above recession levels. I don't think we can put a lot of stock in that because the Fed has not predicted many things accurately this year. They also gave different guidance earlier in the year in terms of how many rate increases they were going to have this year and next year, so the Fed's track record has not been very accurate this year. I wouldn’t put a lot of guidance into that GDP growth number and I would predict that we will be in a recession in 2023.

The bottom line is it’s going to take time. The velocity of rate increases that we're experiencing from the Fed is going to experience a lag effect, and we just don't know what that lag effect is. The Fed doesn't even know because they've never done it at this rate before.

The fed is clearly being disingenuous in their guidance or making things up as they go along. First of all, they said inflation was going to be transitory. Secondly, the Fed is also doing quantitative tightening. This means as mortgage bonds are falling off, they're not renewing them, which is putting upward pressure on interest rates.

Then the third thing is our government, our politicians have printed so much money into the marketplace that it's going to take time for all that money to work its way through. What we did is we printed money while people were out of work and not producing goods. So we created extra demand when the supply was down and that has put a lot of pressure on inflation as well.

Matt’s Advice

In 2023, expect interest rates to potentially rise over the next several months. We've had this period of time where interest rates have shrunk into the low to mid 6% range off of highs of 7%, But with all that, there is a silver lining.

With this current market, there are a lot of sellers and there are a lot of builders that are offering interest rate buydowns or 2-1 rate buydowns. So where rates are in the 6% range, we're seeing people get rates into the 5% and even introductory rates into the 4% range with a 2-1 rate buydown. It’s a great opportunity to lock in a good rate in a market that is now more negotiable.

A lot of people are saying, marry that home and date the rate. It's very true in a potential transitory kind of interest rate environment where rates may go up a little bit and then potentially come back down based on what the Fed is saying.

If you're interested in buying or selling a home in 2023, give us a call today and we'll be happy to walk you through your particular situation and give you advice on whether this is the right time for you to buy and sell.