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Press Release

Economic Growth Expected to Slow as the Fed Wrangles Inflation

February 17, 2022
Rising Mortgage Rates and Even Higher Home Prices Projected to Limit Affordability

WASHINGTON, DC – With inflation at its highest level in four decades, the Federal Reserve is expected to enact a more aggressive course of monetary policy tightening than previously forecast, with a 50-basis-point increase to the federal funds rate in March now predicted to be the first in a series of interest rate hikes through 2023, according to the February 2022 commentary from the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group. The combination of a less accommodative interest rate environment and an increasingly worker-scarce labor market led the ESR Group to downgrade its expectations for 2022 real GDP growth from 3.1 percent to 2.8 percent; however, its expectations for 2023 headline growth remained unchanged at 2.2 percent, a pace that approaches the long-run trend. Risks to the forecast include uncertainty over the future course of inflation, potential geopolitical developments in Eastern Europe, and currently unforeseen COVID-related disruptions to consumer behavior and the labor market.

In addition to a slowdown in economic activity, the ESR Group expects housing activity to moderate from 2021’s highs. Single-family home sales are expected to decline 2.4 percent in 2022 – a slightly steeper drop than the previously anticipated 1.2 percent dip – due to increasing affordability constraints associated with rising mortgage rates. As measured by the FHFA Purchase-Only Index, the ESR Group currently projects home price growth of 7.6 percent in 2022 and 3.3 percent in 2023, down from last year’s record-setting 17.3 percent. With the 30-year fixed mortgage rate now projected to close the year at 3.7 percent, refinance activity, as a share of total single-family mortgage originations, is expected to decline to 36 percent in 2022 from 58 percent in 2021 and could move even lower if rates move further upward.

“Challenges to macroeconomic forecasting have grown not only because of inflation’s largely unexpected persistence but also because of its outsized and broad-based impact on the U.S. economy and global economic growth,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist.

“Headline inflation will likely decline from year-ago levels as price pressures ease, but upward price pressures are not expected to be as fleeting as initially thought – and it’s likely that the period of time required for inflation to be reversed has been extended significantly,” said Duncan. “Compared to a few months ago, financial markets now expect a substantially more aggressive monetary posture from the nation’s central bank, which is likely to result in heightened volatility as the Fed retains the optionality necessary to engineer a non-inflationary soft landing. We currently forecast the Consumer Price Index closing 2022 and 2023 at 4.4 percent and 2.5 percent, respectively, down from a peak of 7.6 percent in the current quarter. If correct, inflation will still be above the Fed’s 2-percent target at the end of next year, despite our expectation of more aggressive Fed action.”

Duncan continued: “For homebuyers, we believe that borrowing costs will likely rise with the increase in mortgage rates, further eroding affordability. At the same time, we expect demographic factors and a shortage of housing supply to be supportive of housing activity. What remains unknown is how higher mortgage rates and tighter monetary policy – through expected interest rate hikes and changes to the makeup of the Fed’s portfolio – will impact home prices.”

Visit the Economic & Strategic Research site at to read the full February 2022 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary. To receive e-mail updates with other housing market research from Fannie Mae’s Economic & Strategic Research Group, please click here.

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic & Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views, including assumptions about the duration and magnitude of shutdowns and social distancing, could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

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