Market Extra: The housing market chill is biting into Fed’s mortgage bond exit

by | Feb 2, 2023 | Stock Market

The Federal Reserve fired off a smaller interest rate increase on Wednesday, while hinting it might soon be toning down its inflation fight, even before it hardly puts a dent in its pile of mortgage bond holdings. “We have no incentive and no intention to overtighten,” Fed Chairman Jerome Powell said in his news conference after the decision to raise its benchmark rate by 25 basis points, which followed a series of six bigger hikes in 2022.

While Powell conceded that the disinflation process has begun, he also said the Fed’s overall battle to keep inflation ticking lower from a 40-year high has yet to be won. “We need to complete the job.” The problem is that a surge in pandemic housing costs still accounts for a big part of the Fed’s inflation headache. U.S. home prices went up by some 40% during the pandemic, only recently beginning to retreat nationally after the Fed dramatically raised its policy rate since March. That pushed up longer term bond yields
and 30-year mortgage rates. “That just took a sledgehammer to affordability,” said Mike Cudzil, a portfolio manager at bond giant Pimco, which oversees about $1.7 trillion in assets. Refinancing activity also slowed to a trickle because many existing homeowners already refinanced at fixed rates below 3.5%, Cudzil said, a trend he thinks is unlikely to reverse soon, …

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