Inflation and Russian invasion of Ukraine are taking their toll on US economy, says Fannie Mae
Russia’s ongoing invasion of Ukraine and its importance to global growth may soon take its toll on the US economy as it pushes inflation higher, according to the latest economic outlook by Fannie Mae.
The latest Consumer Price Index (CPI), which is a key measure of inflation, increased by 7.9% annually a new 40-year high in February. To fight inflation, the Federal Reserve started increase in interest rates however, at its March meeting said more rate hikes would likely be needed to bring it back down.
But now this change in Fed monetary policy prompted Fannie Mae’s Economic and Strategic Research (ESR) Group to scale back its forecasts for economic growth in 2022, according to its March commentary. ESR Group now forecasts real GDP growth of 2.3% in 2022, up from the previous forecast of 2.8%.
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FEDERAL RESERVE RAISES INTEREST RATES: WHAT TO DO NOW
Fannie Mae raises its interest rate forecast
As the Fed continues to raise the federal funds rate to combat increased inflation during the COVID-19 pandemic, other interest rates will rise as well. Fannie Mae raised its projections for mortgage rates this year and next, forecasting the average 30-year fixed-rate loan to rise to 3.8% in 2022 and 3.9% in 2023.
These annual interest rates are currently lower than today’s interest rates, with the 30-year mortgage averaging 4.16% latest data by Freddie Mac.
“Housing is currently serving as a pillar of an otherwise slowing economy, although it is a significant contributor to inflation,” said Doug Duncan, Fannie Mae’s senior vice president and chief economist. “Even as interest rates rise and affordability fall, demographics are still strong support for demand and the scarcity of existing home supply supports new construction and sales.
“The extent to which monetary easing is being capitalized into property values suggests increased risk as interest rates rise, but this may be offset by some evidence that housing construction is a medium-term hedge against inflation,” he continued.
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INFLATION RISE TO ANOTHER NEW 40-YEAR HIGH IN FEBRUARY
Economist says risks remain
Fannie Mae said his economic forecast was based on several assumptions, including a short-term resolution to the Russia-Ukraine conflict. A change in this forecast could bring new economic downside risks.
“A slowing economy, decades of inflation, expired fiscal stimulus, tightening monetary policy and now Russia’s invasion of Ukraine are weighing on the health of the US economy,” Duncan said. “We have revised down half a percentage point on our growth expectations for 2022 this month, but risks remain clearly on the downside. The disruptions in trade in energy, agriculture and other commodities are putting upward pressure on inflation and making an already difficult task for the Federal Reserve even more challenging.”
The ESR Group forecast that despite these challenges, the Federal Reserve will hike the federal funds rate five times in 2022 and three more times in 2023. If you want to take advantage of interest rates ahead of possible future interest rate increases, you might consider refinancing private student loans to lower your monthly payment. Contact Credible to speak to a student loan expert to see if this option is right for you.
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