September 22, 2022

In a move that was widely predicted, the Federal Reserve announced yesterday that it was boosting interest rates by three-quarters of a percent, the fifth rate hike this year. The Fed is expected to continue raising rates, with all eyes on the November and December meetings.

In his Wednesday news conference, Federal Reserve Chairman Jerome Powell mentioned his 2% inflation goal a number of times and noted that U.S. economy had been at that level in the recent past and needed to return to the stability it offered. He conceded that there is a “very high likelihood of a period of much lower growth” as a result of the rate hikes, referencing economists median GDP forecasts of 0.2% in 2022 and 1.2% in 2023. Following the third consecutive three-quarter point rate hike, Powell noted that the Housing sector has already slowed significantly.

Along with singling out housing as one sector impacted by the Fed’s policy, Powell said higher mortgage rates are lowering demand and bringing it more in line with supply. He also  spoke of a very different job market this economic cycle, stating that “job openings are incredibly high in comparison to people looking” and indicated that he wanted to bring them more in line with each other.

For the kitchen and bath industry, which perennially suffers from a lack of skilled workers, a tighter job market could entice more people to consider the construction industry. Powell also spoke of supply chain disruptions showing signs of resolving, a welcome development for the kitchen and bath industry.

Meanwhile, Powell also indicated he intends to hold to the higher rates until he’s sure inflation has been tamed. Goldman Sachs economists predict the first rate cut will not occur until some time in 2024. The concern among economists is that the longer the rates remain high, there is an increased possibility of a recession. Respondents of the the September CBNC Fed Survey, estimate the probability of a recession at more than 50% should the Fed overdo its rate increases.

Given that the housing industry is already in a downturn – August existing home sales just recorded its seventh consecutive monthly decline and is off 19.9% year-over-year –  a prolonged period of high rates could be very damaging. NKBA members are already noticing an increase in the number of clients pausing their project. In fact,  82% of building and construction firms reported cancellations and/or postponements of kitchen remodels in the Q2 Kitchen & Bath Market Index report.

Key Takeaways:

• The Fed continues to be “strongly committed” to taming inflation.
• Rate hikes expected to continue “for some time.”
• The housing sector has already slowed significantly.

By NKBA’s Robert Isler and first published here.

Photo credit: Nuchjaree/Adobe Stock