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The Fed is preparing to introduce a series of aggressive rate hikes after a 25 basis point increase in March followed by a recent 50 basis point gain, the largest rate increase in over two decades, Eye on Housing reports. Despite unprecedented increases in the first few months of 2022, the Fed’s most recent announcement on May 4 aligned with market expectations and signaled a less frenzied approach to combat inflation in the months ahead.

Still, policy expectations from the Federal Open Market Committee point toward a median outlook of seven 25 basis point increases in 2022, ​​plus an additional three 25 basis points of tightening in 2023. Other forecasters, however, predict that the Fed could increase by 75 basis points in June, though that approach seems less likely after slight moderation at the start of May.

Higher inflation in housing is due to a lack of rental and for-sale inventory and cost growth for building materials, lots and labor. Higher interest rates will not produce more lumber. A smaller balance sheet will not increase the production of appliances and materials. In short, while the Fed can cool the demand-side of the economy, additional output on the supply-side is required in order to tame the growth in costs that we see in housing and other sectors of the economy. And efficient regulatory policy in particular can help achieve this goal and fight inflation.

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