- Lumber prices continue to fall as future Fed rate hikes are poised to put more pressure on the housing market.
- Fed Vice Chair Lael Brainard said it's "very hard to see the case" to pause its interest rate hikes.
- Lumber prices have dropped 48% year-to-date as mortgage rates jumped above the 5% threshold.
Lumber prices have seen no relief in 2022 as interest rate hikes by the Federal Reserve have put pressure on the housing market.
Lumber futures contracts measured in 1,000 board feet are down 48% year-to-date and sunk to a new 2022 low on Friday after briefly falling below the $600 level.
The weakness in lumber began to accelerate once rates for the traditional 30-year fixed mortgage rose above 5% earlier this year. That has put pressure on both new and existing home sales in recent months, and various home builder surveys indicated a steep drop in demand once rates surged.
And the Fed has shown no signs of ending its interest rate hiking cycle anytime soon as it focuses on taming inflation. Fed Vice Chair Lael Brainard told CNBC on Thursday that it's "very hard to see the case" to pause interest rate hikes as the effective Fed Funds rate is still way below the neutral rate.
"We've still got a lot of work to do to get inflation down to our 2% target," Brainard said. That work includes multiple 50 basis point interest rate hikes, which are fully expected by investors at the Fed's June and July meetings.
For September's Fed meeting, the market fully expects at least a 25 basis point interest rate hikes, according to CME's FedWatch tool.
Brainard isn't the only Fed official who would like to see swift interest rate hikes to tame inflation. Fed President's Loretta Mester and Mary Daly both reiterated their views in speeches this week that interest rate hikes should continue to rise until inflation shows decisive signs of cooling off.
Ultimately, that's bad news for lumber prices. Rising interest rates tend to quickly flow through to mortgage rates, which should put continued pressure on home building at a time when the spring and summer months are typically the strongest seasonal months of demand for the commodity.
JPMorgan is already seeing that weakness materialize, based on its recent channel checks of home improvement retailers like The Home Depot and Lowe's. "Pro traffic was the most balanced of the day with relative strength in hardware/fasteners and power tools, but, similar to other locations, lumber remained weak," JPMorgan said.