05/26/2022 | Press release | Distributed by Public on 05/26/2022 14:53
Key Takeaways:
The FOMC minutes were in lockstep with the Committee's earlier statements and Chairman Powell's May press conference. We continue to expect two 50-basis point hikes to the federal funds rate at the FOMC's June and July meetings, and we think MBS sales are not likely to begin until sometime next year. Further, the somewhat muted durable goods report is consistent with our forecast for slightly slower, yet still robust, business fixed investment in Q2. Though investment does face some headwinds, including higher interest rates, reports from some major companies of slowing consumer demand, and potential issues arising from COVID-related lockdowns in China, we are unlikely to substantially revise our near-term forecast based on this report.
However, the same cannot be said for new home sales, which came in significantly below our expectations and will cause a downward revision to our near-term forecast. While this series is volatile and prone to large revisions, the new homes sales pace in April was similar in level to the slowdown that occurred the last time the Federal Reserve engaged in a tightening regime in 2018. Given the faster pace of mortgage rate increases to date compared to that period, along with greatly stretched housing affordability, we expect that, compared to the 2018 period, a sharper downturn in residential investment is now underway. Existing home sales are also being impacted by the more than 200-basis point increase in mortgage rates since the end of last year as the pending home sales index is now at its lowest level since the end of 2018, excluding the COVID-induced downturn in spring 2020. The index is currently at a level largely consistent with our near-term existing home sales forecast, but it remains to be seen whether this measure continues to fall or if it levels off as mortgage rates appear to have stabilized for now. Still, given the dramatic slowdown in new home sales may be an early indicator of a sharper turn in all housing activity than we had previously expected, a more general downward revision to our housing outlook may be forthcoming.
Nathaniel Drake
Economic and Strategic Research Group
May 26, 2022
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