The Federal Reserve’s Open Market Committee (FOMC), the rate-setting body that meets roughly eight times per year, voted to keep the short-term policy rate steady, once again, at a range of 5.25 to 5.5 percent. The Fed has been in a holding pattern since its July 2023 meeting, which is widely expected to be the last hike in a tightening cycle that began in March 2022 and resulted in a cumulative 525 basis points of rate increases. Indeed, in the press conference following the statement release, Chair Powell noted that the Federal Funds rate “is likely at its peak.”
Source: Realtor.com
Author: Danielle Hale
An Overall Resilient Economy:
The economy has weathered the increases well. The housing sector, a highly interest rate sensitive sector, is one exception. Existing home sales were not only down in December, but 2023 saw the lowest annual tally since 1995. Nevertheless, the jobs market has maintained resilience, evidenced by a sub 4% unemployment rate and job openings still in excess of unemployed workers. The Fed has also made progress in bringing inflation back toward its 2% target, as it acknowledged in its December 2023 meeting, while also showing that many members project that policy rate cuts will be appropriate at some point in 2024. The Fed’s current policy stance is restrictive and even after a rate cut it would continue to be restrictive.
Investors Expect Cuts Soon:
This is why many investors are positioned to anticipate more rate cuts sooner than the Fed currently projects. The market expects that rate cuts could begin as soon as May and could surpass the Fed’s expected 75 basis points of easing by the end of 2024 by as much as another 50 basis points. This gap is likely to close as incoming data make the path ahead clearer, but in the meantime it could spell more volatility for interest rates across the yield curve, including for mortgage rates.
Mortgage Rate Path Depends on Incoming Data:
After easing sharply at the end of 2023, mortgage rates have steadied in early 2024. The widely quoted Freddie Mac mortgage rate index, which fell sharply to 6.67% in the week after the last FOMC meeting, now sits at 6.69%–essentially unchanged. In order to see mortgage rates drop more significantly, the market and Fed will need to see more evidence that inflation is slowing and that the economy is on a sustainable path. Mortgage rates have been in a rough holding pattern because the data have been relatively mixed recently. I don’t expect we’ll see much of a market reaction to the Fed meeting this week because at this point their actions are much more likely to be shaped by incoming data. And in that respect, the Fed is playing the waiting game just like the rest of us. Fortunately, we’ll get some new information this Friday from the January jobs report, and then the next inflation reading will be available a little more than a week later, on February 13.
Lower Mortgage Rates Are Likely Ahead:
If the data evolve as expected, a normalization in monetary policy is likely in the year ahead. Details on when and how much remain to be seen, but easing rates should help usher in the affordability relief anticipated in Realtor.com’s 2024 Housing Forecast
