The Federal Reserve paused its rate hikes Wednesday, leading housing and banking analysts to predict slower economic growth with an eventual decline in mortgage rates in the foreseeable future.
During an afternoon news conference, Fed Chairman Jerome Powell cited a number of factors in the Federal Open Market Committee’s (FOMC) decision to maintain the short-term federal funds rate it set in May of 5% to 5.25%.
“In light of how far we’ve come in tightening policy, the uncertain lags with which monetary policy affects the economy and potential headwinds from credit tightening, today we decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings,” Powell said. “We understand the hardship that high inflation is causing and we remain strongly committed to bringing inflation back down to our 2% goal.”
In its charge to maintain price stability and employment, the FOMC expects further rate increases this year to reach its target inflation rate, he said.
“Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2% over time,” Powell said.
“Although growth in consumer spending has picked up this year, activity in the housing sector remains weak, largely reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed investment.”
'Keeping Their Options Open'
Since March 2022, the FOMC has raised the benchmark rate by 5 percentage points through a total of 10 consecutive increases in 14 months. The increases have slowly brought the Consumer Price Index down from its mid-2022 high of a 9.1% annual rate of inflation to 4% as of the latest report released this week.
“The return of inflation to the 2% target should lead to a gradual decline in interest rates, including mortgage rates, welcome news for home shoppers,” Realtor.com Chief Economist Danielle Hale said in a statement following Powell’s news conference, citing a recent survey that indicated shoppers’ concern on their ability to afford a home.
MBA Senior Vice President and Chief Economist Mike Fratantoni was not surprised by the FOMC’s decision to hold rates steady, while keeping their options open for the remainder of the year.
“The new set of economic projections shows that the median FOMC member expects two additional hikes by the end of 2023,” Fratantoni said. “Unfortunately, this only adds to the chances that the economy will slow sharply.”
He added that mortgage rates have “generally increased in the past month, and this has slowed the pace of housing market activity, as potential homebuyers have been very sensitive to any changes in rates this year. We expect that mortgage rates will drift down over the second half of the year as the economy slows and the Fed reacts accordingly by holding off on further rate hikes.”
FOMC members acknowledged the impact inflation has on purchasing power and consumer confidence.
“We have been seeing the effects of our policy tightening on demand in the most interest rate-sensitive sectors of the economy, especially housing and investment,” Powell said. “It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.”
Mortgage Rates Moving 'Sideways'
George Ratiu, chief economist at Keeping Current Matters, predicted the Fed’s decision will ensure mortgage rates keep moving “sideways” for the next few months.
“While the Fed’s short-term rate does not directly impact long-term mortgage rates, higher borrowing costs have been trickling throughout the financial system,” Ratiu said. “The 30-year fixed mortgage rate has moved in the 6%–7% range since mid-November 2022, cresting the upper limit several times over the past few weeks. The spread between the 10-year Treasury and the 30-year fixed mortgage rate remains about 300 basis points.”
Economic projections revealed after the Fed meeting were largely unchanged, but the federal funds rate in particular was expected to be half a point higher at the end of 2023 than previously anticipated.
“Considering how far and how fast we’ve moved, we judged it prudent to hold the target range steady to allow the committee to assess additional information and its implications for monetary policy,” Powell said.
In response to media inquiries about the rate pause’s ultimate impact on the housing market, Powell acknowledged that this particular industry is sensitive to interest-rate fluctuations.
“It’s one of the first places that is helped by low rates or held back by higher rates, and we certainly saw that over the past year,” he said. “I don’t know that housing itself is going to be driving the rate’s picture, but it's part of it.”
