With inflation stagnant from last month and consumer goods and unemployment up according to recent federal reports, the Federal Reserve’s Federal Open Market Committee again made the choice (for the eighth time) to leave the nominal interest rate unchanged, keeping it at a 23 year high of 5.50%. Currently, the interest rate has remained unchanged for roughly a year.
At the beginning of the year, the FOMC predicted three interest rate cuts, but with three meetings left before the end of the year—and one meeting before the November election—the Fed has indicated in their most recent statement that cuts may well still be on the table for this year, but the FOMC now only predicting only one cut before the end of the year as they move towards their target inflation rate of 2%.
The most aggressive series of rate hikes in history ended in July 2023 when the committee held off on raising rates due to a litany of factors which consisted of 11 straight rate hikes over 15 months. Since the post-pandemic rate hikes began, the FOMC raised rates in March 2022 (+25 points), May 2022 (+50 points), June 2022 (+75 points), August 2022 (+75 points), September (+75 points), November 2022 (+75 points), December 2022 (+50 points), February 2023 (+50 points), March 2023 (+25 points), May 2023 (+25 points), June 2023 (+0 points), July (+25 points), September (+0 points), November (+0 points), December (+0 points), January 2024 (+0 points), March (+0 points), May (+0 points), June (+0 points), and July (+0 points). This is equivalent to a rise of 5.00 percentage points in under two years with no movement since then.
This string of rate hikes that have occurred since the pandemic has been necessary according to the FOMC to tamp down inflation, which reached a high of 9.1% in June 2022. While inflation has eased, it is still above the committee’s target rate of 2%. However, the Fed predicts that inflation will not come down to their 2% target until sometime in 2026.
The target rate now stands at 5.25-5.50%. The committee next convenes for its sixth meeting of 2024 on September 17-18.
Commentary from the FOMC
“Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderated, and the unemployment rate has moved up but remains low. Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the Committee’s 2% inflation objective.”
“The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”
“In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5.25-5.50%. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to returning inflation to its 2% objective.”
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments. “
Commentary from industry leaders
First American Deputy Chief Economist Odeta Kushi’s thoughts on the meeting were this:
“The Federal Reserve Open Market Committee (FOMC) is widely expected to keep its benchmark rate unchanged at 5.25-5.50 percent at its upcoming July meeting. The Fed’s June Summary Economic Projections suggest only one rate cut in 2024, down from three projected in March. However, continued softening inflation data and a weaker labor market keep the possibility of an additional rate cut alive, with markets betting on three rate cuts this year. By the end of 2025, policymakers expect a policy rate of 4.1 percent, implying four additional quarter-point cuts.”
Kushi also poised and answered the question, “what would a possible fed rate cut (or two) mean for the housing market?”
“The expectation of a Fed rate cut is already exerting downward pressure on mortgage rates. Should incoming data on labor and inflation support a more dovish Fed, we could see further, albeit gradual, declines in mortgage rates. As such, we expect a very modest easing in the affordability constraints holding back potential first-time buyers, as well as a little easing in the magnitude of the rate lock-in effect for existing homeowners.”
“However, a decline in mortgage rates may boost demand more than supply. Traditionally, existing home inventory has made up the bulk of total inventory, and approximately 86 percent of existing homeowners have a rate below 6 percent. So, even if mortgages rates fall gradually through the remainder of this year, they are unlikely to fall enough to ‘unlock’ the majority of homeowners.”
Industry finance veteran Dr. Roger D. Silk had this to say about the most recent meeting:
“The overwhelming majority of the market expects the Fed to cut rates between now and next year. We know this because the Chicago Mercantile Exchange (CME)—the home of most interest rate futures contracts—uses futures prices to calculate the market’s expectations of future interest rates.”
“The CME calculates that as of today, at the July meeting there is about a 10% chance of a rate cut. And the market believes that by the September meeting, it is virtually certain that the Fed will cut rates. The majority of the expectation is for a 25 basis point cut.”
“Another way of divining the market’s expectations is to look at options prices. In particular, we can look at options on the SOFR rate (the Secured Overnight Financing Rate), which is closely correlated with the Fed Funds rate.”
“By looking at the price of options, we can understand how the market is ‘betting’. The Atlanta Fed Funds Tracker reports a 67% chance—based on the prices of financial securities—that the SOFR rate for September 2024 will be in the range of 500 to 525 (5% – 5.25%) basis points. This is lower than the current rate of about 530 basis points (5.3%).”
“Both estimates agree that there is a high probability of at least one 25 basis point cut before the end of the year.”
Dr. Lisa Sturtevant, Bright MLS Chief Economist, also made comments on the news after the meeting ended:
“The Federal Open Market Committee made the decision today to leave the Federal Funds rate unchanged. The lack of movement on rates was expected, but signals from the Federal Reserve indicate a likely interest rate cut at the Fed’s September meeting.”
“It is almost exactly a year since the Federal Reserve stopped raising interest rates. Expectations were for inflation to come down more quickly, but persistent upward pressure on prices—particularly housing costs—has meant that inflation has remained above the target.”
“But with the labor market still strong and consumer spending still upbeat, steady progress toward a 2% inflation measure—rather than hitting the 2% bull’s eye—is what the Fed is looking for in order to implement the first cut to interest rates since 2020.”
“Prospective homebuyers expecting a big drop in mortgage rates after the Fed’s September meeting are going to be disappointed. The mortgage market may have already largely built in the impending rate cut, as we’ve seen mortgage rates come down over the past few weeks.”
“Mortgage rates will come down more this fall, landing at about 6.4% by the fourth quarter. Home prices, however, are not projected to fall so affordability is still a key challenge, particularly for first-time homebuyers. More inventory coming onto the market in the second half of the year will provide more options for buyers and will also moderate home price growth in the months ahead.”
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Austan D. Goolsbee; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Austan D. Goolsbee voted as an alternate member at this meeting.
