What happened: Today the Federal Reserve opted to keep its target for the federal funds rate unchanged in the 5.25%-5.5% range.
Fed Chair Powell acknowledged progress on the inflation front and that monetary policy may be sufficiently restrictive — at least for now. In his statement, Fed Chair Powell left the door open for future rate changes by suggesting the committee will assess new data on a meeting-by-meeting basis to adjust the stance of monetary policy as necessary. High inflation causes hardships for many — especially lower income families — and remains a threat to sustainable economic growth.
Senior Economist Orphe Divounguy’s thoughts on the impact to mortgage rates and housing: 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 indicate supply-side constraints could hinder a full rebalancing of the labor market, causing the downward wage and price adjustment to slow and dragging out the process of returning to the Fed’s inflation target.
Despite one of the most aggressive Fed tightening cycles in recent history, economic activity has been resilient. While the labor market has cooled and wage growth has moderated somewhat, core inflation remains above the Fed’s target. However, the latest Fed decision was not a shock. This is because tighter financial and credit conditions are expected to weigh on economic activity, hold back the labor market and drag down inflation.
Many investors expect the Fed to be done with its hiking cycle. Chair Powell’s comments took a dovish tone as he emphasized the impact that tightening financial and credit conditions could have on the US economy. Longer-term yields — which mortgage rates tend to follow — fell as a result.
Rising interest rates and tighter credit conditions have already reduced housing demand. Higher mortgage rates — the highest in 22 years — combined with high prices have pushed affordability to 40-year lows, driving a significant reduction of sales of existing homes this year. Higher mortgage rates are also driving a recent decline in housing starts. Historically, housing starts have been predictive of business cycles.
The slowdown in economic activity and conflict abroad make U.S. Treasurys more attractive, preventing further large increases in the Treasury yields — and mortgage rates. Mortgage rates have been extremely volatile this year, as investors have been reacting to the latest economic data and their expectations about what the Fed will do next. Unfortunately, that’s likely to continue. Productivity and labor costs readings this week will likely lead to strong movements in mortgage rates.