Concluding its two-day Federal Open Market Committee (FOMC) meeting, the Federal Reserve announced in a statement its decision to leave monetary policy unchanged and maintain its target range for the federal funds rate at 5.25-5.5%. The Fed was widely expected to keep its benchmark rate unchanged, and so the central bank’s fight against inflation goes on.
The decision to leave rates unchanged was unanimous, Powell told a room of reporters in a press conference following the announcement. “We are balancing the risk of going too soon with the risk of going too late,” he repeated throughout the session. Asked if the lag between tightening monetary policy and witnessing the effects of tighter policy in the economy could screen the Fed from seeing the risk of “going too late,” Powell said policymakers didn’t think so.
Rather, if the data continue to trend in favor of low inflation and strong employment, “a reduction in the policy rate could be on the table at the September meeting,” Powell said toward the end of the press conference. “We’re nearing that time.” There are no indications in the data, he reiterated, that the economy is overheating or sharply weakening, explaining his and fellow policymakers’ confidence in today’s decision. “It’s kind of what you want to see.”
Powell’s remarks mostly echoed those he made following June's FOMC meeting, when the Fed provided its quarterly update to the “dot plot,” which showed 15 of the 19 policymakers predicting at least one rate cut in 2024 — eight officials estimating two cuts, seven officials estimating one cut — and four officials predicting zero cuts this year.
Asked today whether a September rate cut is a reasonable expectation, Powell made very clear that no decisions have been made about cutting rates in September.
Growth of consumer spending has slowed from last year’s “robust pace,” he noted, but remains strong. Supply-and-demand dynamics have come into better balance in the labor market. The unemployment rate has increased, but remains low, he also noted, at 4.1%. In what ways, then, is the Fed still not confident that inflation isn’t headed sustainably toward its 2% goal, Powell was asked?
"More good data would cause us to have more confidence,” he replied, stressing that one quarter of favorable inflation data following one quarter of unfavorable inflation data is still only one quarter of favorable inflation data following one quarter of unfavorable inflation data.
That being said, inflation was higher than 4% last July when the Fed nudged its benchmark rate into the target range it has maintained for the past 12 months. Headline inflation is now at 2.5% and core inflation at 2.6%, as of the latest inflation readings. Powell noted that the economy is experiencing a broader disinflation, to include slowing shelter inflation, than occurred last year in mostly goods’ prices.
“We don’t need to be 100% focused on inflation because of the job we’ve done,” said Powell. The better balance in the economy between risks tied to the Fed’s dual mandate — maximum employment and stable prices — has allowed policymakers to better balance its own focus between those poles. “What the data broadly show in the labor market is the ongoing gradual return to normalization,” not concerning Fed policymakers.
As for how a September rate cut could impact the housing market, First American Deputy Chief Economist Odeta Kushi said rate cut expectations have already exerted downward pressure on mortgage rates. “As such,” she said, “we expect a very modest easing in the affordability constraints holding back potential first-time buyers, as well as a little easing in the magnitude of the rate lock-in effect for existing homeowners.”
A decline in mortgage rates could boost demand more than supply, though. Approximately 86% of homeowners with mortgages have a rate below 6%. Multiple rate cuts would likely be necessary to unlock substantial numbers of locked-in homeowners. One or two rate cuts, however, could materially change affordability calculations for first-time homebuyers, boosting demand.
As long as home sales remain out of reach, though, so will origination volume for mortgage companies.
“Even with a September rate cut possible, mortgage companies will continue to face meaningful earnings headwinds for the foreseeable future,” said Eric Orenstein, senior director of nonbank financial institutions for Fitch Ratings. “With most outstanding mortgages still carrying rates below 5% and record home prices driving down affordability, it may be a long road back to higher origination volumes.”
Added CoreLogic Chief Economist Dr. Selma Hepp, “Lower mortgage rates in recent weeks suggest the mortgage markets are also anticipating a rate cut which should boost buyer demand at the end of the year."
