Russia’s ongoing invasion of Ukraine and what it means for global growth could soon begin to take its toll on the U.S. economy as it pushes inflation higher, according to the latest economic outlook from Fannie Mae.
The latest Consumer Price Index (CPI), which is a key measure of inflation, increased 7.9% annually in February, a new 40-year high. In an effort to fight inflation, the Federal Reserve began raising interest rates at its March meeting but said more rate hikes will likely be needed in order to bring it back down.
But now, this change in the Fed’s monetary policy caused Fannie Mae’s Economic and Strategic Research (ESR) Group to reduce its projections for economic growth in 2022, according to its March commentary. The ESR Group now projects real GDP growth of 2.3% in 2022, down from its previous projection of 2.8%.
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Fannie Mae ups its interest rate forecast
As the Fed continues to raise the federal funds rate to battle inflation that rose during the COVID-19 pandemic, other interest rates will also rise. Fannie Mae raised its predictions for mortgage rates this year and next, forecasting that the average 30-year fixed-rate loan will rise to 3.8% in 2022 and 3.9% in 2023.
"Housing is currently acting as support to an otherwise slowing economy, although it is adding significantly to inflation," Doug Duncan, Fannie Mae senior vice president and chief economist, said. "Even as interest rates are rising and reducing affordability, demographics are still strong supports for demand, and the paucity of existing home supply is supporting new construction and sales.
"The degree to which monetary ease is capitalized into home values suggests increased risk as rates rise, but this may be offset by some evidence that housing is an intermediate-term hedge against inflation," he continued.
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Economist says risks remain
Fannie Mae said its economic forecast is based on several assumptions, such as a near-term resolution to the conflict between Russia and Ukraine. A change in this prediction could present new economic downside risks.
"A slowing economy, decades-high inflation, expired fiscal stimulus, tightening monetary policy, and now Russia’s invasion of Ukraine are all weighing on the health of the US economy," Duncan said. "We marked down our growth expectations this month by half a percentage point for 2022, but risks remain firmly to the downside. The interruptions to the trade of 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 predicted that despite these challenges, the Federal Reserve will raise the federal funds rate five times in 2022 and another three times in 2023. If you want to take advantage of interest rates before any potential future rate hikes, you could consider refinancing your 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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