Look, according to Redfin News, we're heading into a pretty significant week for the housing market because the Federal Reserve is almost certainly going to raise interest rates this Wednesday. The market is pricing in better than ninety percent odds of a hike, and nearly all the Wall Street economists have switched their forecasts from holding steady to hiking. This came after Friday's inflation data showed core inflation coming in a bit hotter than expected, which has convinced most people that the Fed will need to act.
Now here's where it gets interesting. The economic case for actually raising rates isn't nearly as clear cut as the market reaction suggests. If you look at the details, core inflation measured by the PCE, which is what the Fed pays closest attention to, is expected to come in around three point three percent annually. That's elevated, sure, but some economists argue that much of this excess inflation comes from temporary factors that don't really require the Fed to tighten policy. Plus, consumers are already pessimistic about the economy, with sentiment hovering near historic lows.
The Fed faces a bit of a credibility problem here. Because the Fed Chair has communicated pretty minimally with markets lately, the central bank risks losing credibility if it doesn't deliver the hike that markets are now expecting. At the same time, there's a real economic argument that waiting would have been reasonable given that inflation has actually been moving in the right direction recently.
What seems most likely is that the Fed raises rates this week but signals that it might not do as many additional hikes as the market currently expects for the rest of the year. Financial conditions have already tightened quite a bit recently, so the committee might be hesitant to keep pushing rates higher. Of course, what happens to mortgage rates depends on how bond markets react to the Fed's actual decision, their forward guidance, and whether investors believe the Fed is truly committed to getting inflation down to its two percent target.
What I am seeing locally in the Bay Area and East Bay is that clients are increasingly anxious about timing. A rate hike this week doesn't necessarily mean mortgage rates will rise by a predictable amount because the relationship between Fed policy and what you pay on a mortgage is complicated. My advice to buyers and sellers right now is to stay focused on fundamentals and not get too caught up in trying to time the market around Fed meetings.
