The best indicator of monetary policy’s impact on the broader economy is what you see when “looking out the window,” Federal Reserve Chairman Jerome Powell told a room full of reporters following the Federal Open Market Committee’s (FOMC) January 28-29 meeting.
“We do not need to be in a hurry to adjust our policy stance,” he explained while announcing policymakers' decision to hold the central bank's benchmark borrowing rate at its range of 4.25%-4.5%, as financial markets anticipated. The central bank’s position, Powell added, remains well above estimates of what the neutral rate might be.
Long-term rates have increased since the easing cycle began last September, resulting in mortgage rates soaring back over 7%. But, Powell called that a “term-premium story” relatively divorced from the central bank’s decisions on overnight rates. Be that as it may, no help for housing finance emerged from this month's meeting.
“The Fed’s pause on rate cuts confirms what Treasury yields have been telling us,” commented Eric Orenstein, senior director at Fitch Ratings. “Inflation risks are likely to keep mortgage rates high in the near term.”
When asked about the risks he might see as challenging his assessments of a strong labor market and stable economic growth, Powell noted any significant decline in hiring or declining conditions for the lower-income households he said are already “under significant pressure.” Ultimately, today’s decision to hold rates steady aligned with the forecasts released at last month's FOMC meeting.
"There's no burning sign that says he had a move he had to make yesterday," says Kevin Ryan, president and chief financial officer (CFO) at Better. "There was nothing, and obviously it was telegraphed and the market saw that and 0% of the people who actually pay attention were surprised by the way it went."
That didn't prevent President Trump from pestering Powell online, writing on Truth Social after the rate-cut pause was announced, “If the Fed had spent less time on DEI, gender ideology, ‘green’ energy, and fake climate change, Inflation would never have been a problem."
Questions About White House Pressure
In December, Powell pushed back against insinuations that uncertainty concerning the incoming Trump administration’s policy agenda presented the primary upside risk to a speedier pace of rate cuts in 2025. At the time, Powell assured the room full of reporters that pausing on easing would allow restrictive monetary policy to lower the “new price level” that had been established by pandemic-driven inflation.
Consumers were not feeling the effects of high inflation, he said, but the effects of high prices. Powell reiterated that sentiment on Wednesday, while declining to offer any substantive responses to questions concerning Trump's stated agenda.
Economists widely anticipate campaign promises like mass deportations and across-the-board tariffs to carry inflationary effects, not to mention a slowdown in U.S. economic output, as Bloomberg reports resulted from Trump’s first trade war with China.
With consumer prices rising at an annual rate of 2.9% last month, recent reports signaling a consumer spending slowdown in December seemed (in hindsight) to foreshadow a consumer confidence correction that emerged in figures released this week by the Conference Board. Declining consumer confidence in the broader economy, to include in future employment, suggests that any Trump administration moves that result in higher prices at home could lead to further deterioration in consumer spending and sentiment.
The Federal Reserve and Powell faced concerted pressure from President Trump during his first administration to aggressively lower interest rates. Last week, Trump told attendees at the World Economic Forum in Davos, Switzerland, that he knows interest rates better than the Fed, and demanded that interest rates “drop immediately.”
When pressed by a CNBC reporter, Jerome Powell said he’s “had no contact” with President Trump since those comments were made last week. “The public should be confident that we will continue to do our work as we always have,” he said. “You can take away from all of this that we remain committed to achieving our 2% inflation goal sustainably,” he added.
Powell acknowledged that policymakers have modelled how certain policy shifts would impact the data that rate-makers hold so dear. To that end, however, the committee is “very much in the mode of waiting to see what policies will be enacted,” Powell said, noting that elevated short-term volatility does exist concerning potential policy changes around immigration, tariffs, fiscal policy, and regulatory policy.
"That's his job, is to block it out," says Better's Kevin Ryan. "The market conditions and actual backwards-looking data suggest that a pause is a fine answer. There's clearly uncertainty as to what's coming out of the administration. How much is rhetoric and how much is reality is uncertain, and so you have another reason to pause and be nimble, and so you pause and be nimble."
Outlook For The Mortgage Industry
David Sober, SVP of Enterprise Business Development at Voxtur Analytics, a publicly traded real estate technology company, says today’s decision “is likely a long-term trend, with interest rate reduction not expected until the second half of the year. This keeps the housing economy in an extended period of malaise, with affordability at its lowest point in memory.”
Unrelenting affordability pressures, regional variations in rising home supply, and continued home price appreciation have eroded many prospective buyers' access to the market, particularly younger, first-time homebuyers lacking affordable entry-level options. Sober added that it would be “a pleasant surprise” if mortgage rates managed to dip to 6% this year.
With home prices chugging ever higher, however, Fannie Mae recently raised its mortgage rate forecast for 2025, now expecting rates to end the year near 6.5%, and 2026 near 6.3% — roughly 20 and 40 basis points higher, respectively, than shown in their December’s outlook.
Tim Lawlor, chief financial officer (CFO) at Kiavi, a private lender to residential real estate investors, said strong job reports in recent months are likely giving policymakers pause for now.
“Over the next twelve months,” Lawlor said, “we would expect some degree of further cuts given the reduction in inflationary data we have seen and their consistent commentary about long term targets being closer to 3%.” That being said, since the Fed met last month, 10-Year Treasury yields have returned to the levels where they were a year ago, and mortgage rates have returned to their highest levels since last July, driving down applications and lock volumes.
“While we may not see the same velocity of change in 2025,” Lawlor added, “we should expect some slow decline in rates as the Fed exercises some degree of rate cuts.”
