Wednesday’s FOMC meeting results featured a 25-basis point rate in the Fed Fund rate that was in line with trade expectations, but the post-meeting statement removed a previous comment about “ongoing rate increases,” and this was viewed as a signal that the Fed was approaching its terminal rate level. Fed Chair Powell said that the Fed would have raised rates higher if it were not for the banking concerns, but he also said that the credit tightening that results from the crises will have the same impact on the US economy as a 25-50 basis point hike.
As the Fed started to address rising inflation last year, mortgage interest rates also saw dramatic increases. The average Freddie Mac 30-year fixed rate started 2022 at 3.11%, which was slightly its record low of 2.65% from January 2021. By last November that benchmark had risen to 7.08%, and its most recent weekly reading was 6.42%.
As one would expect, the rising rates had a chilling effect on the US housing industry. After reaching a 16-year high in March 2022, US building permits fell to a 2 1/2 year low by November, and housing starts fell to a 2 1/2 year low in January this year. However, the readings for both indicators came in well above trade forecasts for February and had large increases from January. This suggests that the housing sector was already improving before this month’s banking crisis.
With the Fed appearing to be closer to its terminal rate, a return to relative calm in the US banking sector could result in even stronger housing data in the second quarter and after. Copper and lumber would be major beneficiaries of sustained improvement in the sector, while other commodities, such as the energies, platinum group metals, cotton, and livestock, should also find support.
Originally Published March 24, 2023
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