At its final policy meeting of 2023, the Federal Reserve opted to maintain interest rates within a range of 5.25% to 5.5%, marking the third consecutive meeting without a rate change. This decision is indicative of the central bank's likely conclusion of its historic campaign to raise rates in an effort to control inflation.
While the possibility of rate hikes has not been ruled out entirely, a subtle shift in the policy statement suggests that rate increases may be on hold. The Federal Reserve's policy statement acknowledges that inflation has eased over the past year, but it also reiterates that inflation remains elevated.
Most notably, the Federal Reserve released new forecasts indicating that the majority of its top officials anticipate multiple rate cuts in 2024. The median projection suggests that by December of the following year, the Fed's target rate will stand at 4.6%, which is 0.75 percentage points lower than the current level. Furthermore, the median official envisions a full percentage point reduction to 3.6% by the end of 2025.
The shift towards potential rate cuts comes in contrast to the sentiment at the Fed's September meeting when 12 out of 19 top officials expected one more rate hike in 2023. However, lower-than-expected inflation readings led to a change in course. The median inflation forecast for this year has adjusted from 3.3% to 2.8%, closer to the Fed's 2% target.
While Fed officials remain relatively optimistic about the economy's prospects, with a 4.1% unemployment rate projected for the end of 2024, they have also revised upward their 2023 growth forecast to a 2.6% rise in GDP, compared to the 2.1% envisioned in September.
In the new policy statement, the Federal Reserve lists factors that will determine "the extent of any additional policy firming," signaling a departure from past language that suggested further rate hikes were more certain. This shift reflects the evolving economic landscape and growing consensus among policymakers for the possibility of significant rate cuts in 2024, despite earlier expectations of continued rate hikes.
“With today’s announcement of a continuation of the pause on interest rate increases by the Fed, it is hopeful that we are one step closer to an eventual reduction in interest rates," Michele Raneri, vice president of U.S. research and consulting at TransUnion, said. "A reduction in interest rates could not only help in stimulating the mortgage origination market, but could also provide an opportunity for millions of consumers who have recently taken on high interest mortgages to refinance and see significant impacts to their monthly budgets."
Fed Chairman Jerome Powell said the FOMC participants don't view it as an "appropriate" time to raise rates, but they also don't want to take it off the table.
"We are prepared to tighten policy further if appropriate," Powell said.
Mortgage Bankers Association's Chief Economist Mike Fratantoni said the projections indicate a faster pace of rate cuts in 2024.
“While the projections don’t show much of a change in the committee’s expectations regarding economic growth or the job market, they do recognize the faster pace at which inflation has declined in 2023 and see further slowing back to the 2% target," Fratantoni said, adding, “additional rate hikes no longer appear to be part of the conversation. It is all about the pace of cuts from here. This is good news for the housing and mortgage markets. We expect that this path for monetary policy should support further declines in mortgage rates, just in time for the spring housing market."
The MBA maintained its Dec. forecast Wednesday for mortgage volume of one-to-four family units to reach $1.639 trillion for the year. It had started the year projecting this group would reach $1.88 trillion in originations.
