What happened: 

Today the Federal Reserve opted to keep its target for the federal funds rate unchanged in the 5.25%-5.5% range.

The Federal Open Market Committee (FOMC) is still concerned with stubbornly high core inflation. In his statement, Fed Chair Powell left the door open for future rate increases, suggesting the committee will assess new data on a meeting-by-meeting basis to determine whether the current fed funds rate is sufficiently restrictive.

Senior Economist Orphe Divounguy’s thoughts on the impact to mortgage rates and housing: 

On the surface, the Fed’s decision to keep the federal funds rate unchanged appears to be a positive sign that mortgage rates may be near their peak. However, a closer read of Chair Powell’s comments and the FOMC’s summary of economic projections indicate the period of relatively high mortgage rates and large swings may not yet be behind us. If rates stay elevated into the fall – typically a cooler time for the housing market – expect to see more price cuts or concessions from sellers looking to meet buyers where they’re at. 

Despite one of the most aggressive Fed tightening cycles in recent history, economic activity has been resilient and the US economy has been able to avoid falling into a recession. While the labor market has cooled and wage growth has moderated, core inflation remains above the Fed’s target.

The latest Fed decision was somewhat anticipated. However, the FOMC’s summary of economic projections indicates that most members of the committee expect that it could take longer for core inflation to return to target. Longer term yields and mortgage rates – which mostly reflect investors’ expectations – are likely to remain elevated as a result.

As usual, investors shifted their focus to Chair Powell’s press conference, where he expressed concerns that inflation remains high and stated that determining whether policy is sufficiently restrictive will be based on incoming economic data. 

Many investors expect the Fed to be done with its hiking cycle, though Powell indicated further hikes could be in the cards. Although core inflation remains above the Fed’s target, tighter credit, rising oil prices, and student loan repayment could slow consumer spending, and business and residential investment further. 

Higher interest rates and tighter credit conditions have already reduced housing demand, as well as supply from both existing homeowners and new construction. High mortgage rates combined with high prices have pushed affordability to 40-year lows, driving a significant reduction of sales of existing homes this year. Zillow’s latest forecast expects 18% fewer existing homes sales in 2023 compared to last year. 

Mortgage rates that doubled in 2022 and have stayed elevated have also seriously curbed current homeowners’ desire to sell – nearly 800,000 fewer existing homes have come onto the market through August this year compared to last. 

Higher mortgage rates are also driving a recent decline in new home construction. Historically, housing starts have been predictive of business cycles. A rapid slowdown of the US economy could result in some policy easing, which would alleviate pressure on mortgage rates and maybe even see them fall slightly.

Mortgage rates have been extremely volatile this year, as investors have been reacting to the latest inflation and economic data depending on their expectations about what the Fed will do next. Unfortunately, that’s likely to continue until the end of the Fed tightening cycle. Core PCE inflation readings next week will likely lead to large swings in mortgage rates.