Fed Likes, Fed Pauses, Fed Wants More

The Fed decided Wednesday not to change rates, and for the first time since it began raising rates in early 2022, Fed Chair Jerome Powell said he was pleased by rate of improvement in inflation over the past three months.

However, Powell said the Federal Open Market Committee (FOMC) wants to see at least that rate of improvement continue before deciding at its next meetings whether the economy needs another jolt of interest rate hikes to bring inflation down to its 2% target.

NAFCU Economist Noah Yosif said the decision “suggests a positive outlook among committee members regarding the trajectory of inflation, despite some acceleration within headline numbers due to rising energy prices.”

The FOMC decided to keep the target for the Federal Funds Rate in the 5.25% to 5.50% range. It had raised rates from near zero in March 2022 to a 5.00% to 5.25% range in May. It paused in June and then raised rates to 5.25% to 5.50% in July.

Twelve of the 19 FOMC members said they expect rates will need to increase at one or both of the Fed’s final two meetings this year, which end Nov. 1 and Dec. 13.

“Really what people are saying is, ‘Let’s see how the data come in.’ We want to see that these good inflation readings that we’ve been seeing for the last three months, we want to see that it’s more than just three months,” Powell said.

More than half of FOMC members said they expect the mid-point of that range would need to be at 5.6% by December, the same median reported from June’s meeting. They still expect rates to fall in the next two years, but to levels half a percentage point higher than they expected in June. At this week’s meeting, the median expectation was ending the years at 5.1% in 2024 and 3.9% in 2025.

Yosif said the projections reflect both waning recessionary concerns and FOMC members’ preference for “a higher-for-longer approach to counter remaining inflationary concerns rather than additional hikes.”

While most members said they expected a late-year rate hike, Yosif said he believes members are keeping the option on the table to prevent markets from becoming overly optimistic. “But NAFCU anticipates no further hikes in this cycle, with the next rate cut arriving around the middle of next year.”

Mike Fratantoni, chief economist for the Mortgage Bankers Association, said the pause was expected.

“However, the FOMC members’ projections signal that they believe they are not yet done in their fight to bring inflation down. The majority of FOMC members still expect another hike this year, even though core inflation has slowed,” Fratantoni said. “And many FOMC members now expect that the pace of cuts in 2024 will be somewhat slower than they had thought in June.”

Fratantoni said MBA economists expect inflation will continue to drop closer to the Fed’s target, the job market will continue to slow, and that

“Mortgage rates should begin to reflect that the Fed’s moves in 2024 will be cuts — not further increases. This should provide some relief in terms of better affordability for potential homebuyers,” he said.

Despite high rates, permits for new homes continue to rise, and the biggest obstacle for potential buyers is lack of inventory as homeowners are reluctant to sell houses and abandon historically low-interest mortgages.

“If mortgage rates trend down in 2024 as we anticipate, the combination of more homes for sale and somewhat lower rates should support stronger purchase volume,” he said.