The housing industry and market watchers in general are preparing for a big week as the Federal Reserve (Fed) is set to announce its next benchmark interest-rate move on Wednesday, Sept. 21, with most observers expecting at least a 75-basis point bump.
Prospects for a historic one percentage point increase, however, remain on the table, according to some market watchers.
Investment bank Goldman Sachs’ economic-research arm is betting the Fed’s Federal Open Market Committee (FOMC) will boost the federal-funds benchmark by 75 basis points, to a target range of 3% to 3.25%.
“The bond market is pricing a one-in-four chance of a 100-basis point hike,” Goldman Sachs reports in a FOMC preview delivered by email on Sunday, Sept. 18. “A third ‘unusually large’ hike would be a reversal from the plan Chair Powell laid out in July to slow the pace of tightening, despite little surprise on net in the data.”
Goldman Sachs cites several reasons to expect another large rate bump from the Fed this week, however. Among them are the following: “The equity market threatened to undo some of the tightening in financial conditions that the Fed had engineered, labor market strength reduced fears of overtightening at this stage, [and] Fed officials now appear to want somewhat quicker and more consistent progress toward reversing overheating [fast-rising inflation]….”
Analysts with global financial-services company Nomura Holdings see the FOMC opting for a one percentage point boost in the federal funds rate this week.
“Materializing upside inflation risks are likely to result in the Fed raising rates by 100 basis point [1 percentage point] at the September FOMC meeting, above our previous forecast of 75 basis points,” Nomura states in an analyst note.
The annual U.S. inflation rate was down for the second month in a row in August, to 8.3%, compared with 8.5% in July. Still, the August mark was above market expectations of 8.1%. Core inflation, which excludes energy and food prices, hit 6.3% in August, up from 5.9% recorded in each of the two prior months.
Diane Swonk, chief economist at tax and advisory services giant KPMG, told the Washington Post that said that a 100 basis point boost to the federal funds rate should be on the table, but added that also comes with risks.
“Even though here I am arguing for an even bigger increase, the real issue is rapid increases themselves are destabilizing,” Swonk said.
The CME Group‘s FedWatch tool, which tracks the probability of FOMC rate moves, as of today, September 19, put the probability of a 75-basis point rate hike at 84% — down from 91% a week earlier. Odds for the FOMC lifting the federal funds rate by a full percentage point on Wednesday of this week, to a target range of 3.25% to 3.5%, stood at 16% as of today, up from 0% a week earlier.
Likewise, FedWatch as of today puts the odds of the FOMC adopting a 50-basis point rate bump at its September meeting at 0%, down from 9% a week earlier.
The Fed’s Federal Open Market Committee (FOMC) has raised the federal funds benchmark rate four times this year, including a 25 basis-point boost in March; a 50 basis-point jump in May; and a 75 basis-point increase in June and again in July — bringing the current benchmark rate to a target range of 2.25% to 2.5%. The rate bump in March represented the first time since 2018 that the Fed has increased rates.
“[Mortgage] rates have been on an upward trend, with the average 30-year fixed rate topping 6%,” MCT’s daily report states. “With home prices also near multi-year highs, demand has been hampered for many via affordability, which is weighing in on application demand across the country.
“Mortgage rates are under upward pressure this morning as the Fed decision gets closer.”
Following this week’s meeting, the FOMC will meet again in November and December this year.
“We expect 50-basis point hikes in November and December, taking the funds rate to 4% to 4.25% at yearend,” Goldman Sachs’s FOMC preview report states, adding that “we expect the FOMC to slow the pace of rate hikes because … concern about overtightening will eventually rise….”