The Federal Reserve (Fed) maintained the federal funds rate in the 5% to 5.25% range on Wednesday, following 10 consecutive hikes that brought rates to a level never seen since 2007.
The Federal Open Markets Committee (FOMC) has decided to pause its rate hikes in June after data that pointed to cooling inflation and the need to assess how much banks have slowed down their lending due to the recent tumult in the sector.
Policymakers also want to evaluate the impact of their actions on the economy so far. The Fed imposed its fastest series of rate increases since the 1980s, but it wants to avoid over-tightening and causing a significant recession.
May’s inflation data aided the Fed in making today’s decision. The Consumer Price Index in May rose just 4% year over year, before seasonal adjustment, compared to a 4.9% increase in April. Real wages also continue to fall, suggesting that the Fed has cooled, if not broken, the labor market.
“Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” the Fed said in its post-meeting statement. “In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
But it’s a delicate balance.
A series of bank failures — including Silicon Valley Bank, Signature Bank and First Republic Bank — have spurred concerns that banks are reducing their appetite for new loans, hurtling the economy towards a recession. Fears of a commercial real estate collapse have also emerged.
Fed Chairman Jerome Powell told reporters on Wednesday that it makes sense to moderate rate hikes as the policymakers get closer to the destination. The benefits of that, according to Powell, is that the Fed officials can access more information to make better decisions.
“The main issue that we’re focused on now is determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time,” Powell said. “So, the pace of the increases and the ultimate level of increases are separate variables. Given how far we have come, it may make sense for rates to move higher, but at a more moderate pace.”
Regarding the banking crisis, Powell said that “we don’t know the full extent of the consequences of the banking turmoil that we’ve seen.” However, with today’s decision, the Fed will “have some more time to see that unfolding.”
What’s next?
Investors are waiting for indications of what will happen next, as the macroeconomic policy crafters have yet to break the labor market and inflation levels are still double the 2% target.
The CME FedWatch Tool showed a 98% chance the Fed would hold rates at the current range on Wednesday morning, according to interest rate traders. However, 60% of these investors bet officials will impose a rate hike at the July 26 meeting.
In favor of another rate hike is the fact that employment continues to rise and consumer spending has been resilient. According to the latest labor market report, total nonfarm payroll employment rose by 339,000 jobs in May, compared to April.
The FOMC published new projections for the U.S. economy that expect the GDP to change by 1% in 2023 compared to 0.4% estimated in its March meeting. The unemployment rate is expected to be at 4.1% (compared to 4.5% in March) and the PCE inflation is projected to be at 3.2% (compared to 3.3% in March).
Policymakers also expect the federal funds rate at 5.6% at the end of 2023, which opens the door to the possibility of two rate hikes at the end of this year. March’s projection was at 5.1%.
“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%,” Powell said. “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. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.”
Today’s Fed decision will have an impact on the housing market. Industry experts believe mortgage rates will remain high compared to last year.
Ahead of the Fed meeting, mortgage applications picked up last week as rates dropped slightly – another factor that impacted rates was the debt ceiling agreement.
On Wednesday afternoon, mortgage rates for 30-year fixed-rate mortgages were at 6.70%, according to HousingWire‘s Mortgage Rates Center. However, at Mortgage News Daily, mortgage rates were higher, at 6.98%.
“For real estate markets, today’s decision by the Fed will ensure that mortgage rates are likely to keep moving sideways for the next couple of months,” George Ratiu, chief economist at Keeping Current Matters, said in a statement. “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 Fed’s pause means borrowers can see, for June, a stabilization of rates across a range of industries, particularly mortgage and credit cards, according to Michele Raneri, vice president and head of U.S. research and consulting at TransUnion.
Raneri said in the mortgage market, “It remains to be seen if, in the short term, this will spur many who have been holding off to finally engage in a new purchase or refinance, or if they will continue waiting until rates begin dropping.”
I was pleased to see commentary from Selma Hepp at CoreLogic, “Coming into today’s meeting; it was clear that the Fed would hold steady on an additional rate hike but would open the door for more in the future. Unfortunately, while inflation has been moderating, it remains well above the Fed’s comfort level. Also, the likelihood of another hike or two has also increased, given the lack of credit crunch the Fed was expecting from the banking sector. As a result, mortgage rates, while still on a gradual decline, are likely to remain higher through the remainder of the year.”