Federal Reserve Holds Interest Rates Steady Amidst Inflation and Housing Market Challenges

The Federal Reserve pauses interest rate cuts amid strong employment and inflation, impacting mortgage rates and housing market dynamics as challenges persist.

On Wednesday, the Federal Reserve opted to pause its recent trend of lowering interest rates, keeping them steady in the 4.25% to 4.5% range.

This decision was in line with market expectations, influenced by strong employment and inflation reports that signal a healthy U.S. economy.

Market Expectations and Analyst Predictions

Leading up to the announcement, analysts predicted that after the Fed’s cuts in September, which included a 50-basis-point drop followed by two 25-point reductions in November and December, there would be no further rate cuts for now.

Eric Orenstein from Fitch Ratings noted that this pause reflects concerns over persistent inflation risks, which may keep mortgage rates high in the near term.

He mentioned that while a significant drop in long-term rates could boost mortgage refinancing, overall market activity has cooled compared to three months ago.

David Sober of Voxtur Analytics suggested that the Fed’s decision to hold rates steady may hint at a trend, with interest rate cuts not expected until later this year.

He warned that the housing market will likely continue facing challenges due to low affordability but pointed to independent mortgage banks as a potential source of innovation for homebuyers.

He speculated that mortgage rates dipping to 6% by 2025 would be a pleasant surprise.

Fed Chair’s Statements and Inflation Monitoring

During the press conference after the meeting, Fed Chair Jerome Powell discussed various factors influencing their decisions, including tariffs, immigration, and fiscal policies under the new Trump administration.

He emphasized the need for clearer policies before making any economic predictions.

Melissa Cohn from William Raveis Mortgage urged people to monitor the Personal Consumption Expenditures (PCE) index, which is the Fed’s key inflation gauge.

Upcoming data releases could provide insights ahead of the Fed’s next meeting in mid-March.

She noted that the PCE index has consistently hovered slightly above the Fed’s 2% target since August.

Cohn reinforced that the Fed operates independently and won’t bow to external pressures, including President Trump’s calls for rate cuts to boost the economy and home sales.

She made it clear that mortgage rates will continue to respond to inflation and employment data, regardless of the uncertainties surrounding Trump’s new policies.

When asked about his discussions with Trump, Powell stated he has had no direct communication regarding these matters and emphasized the Fed’s commitment to its goals without outside influence.

Trends in Mortgage Rates and the Housing Market

Despite the Fed reducing the federal funds rate by 100 basis points since September, mortgage rates have actually risen.

The average 30-year mortgage rate climbed from 6.31% in mid-September to 7.12% as of Wednesday.

Analysts pointed out that mortgage rates usually track more closely with Treasury yields.

Logan Mohtashami, Lead Analyst at HousingWire, highlighted the narrowing gap between the 10-year Treasury yield and 30-year mortgage rates, suggesting the housing market could have sustained even greater damage without this improvement heading into 2025.

Mochashami noted that had the highest spreads from 2023 applied today, mortgage rates might have shot up to nearly 8%.

However, with more typical spreads, rates could be 0.74% to 0.84% lower, nearing the 6% mark.

Scott Bessent, the new Treasury Secretary, might wield more influence over mortgage rates than Trump himself.

He has proposed using Fannie Mae and Freddie Mac’s earnings to buy mortgage-backed securities, a move that could lower mortgage rates and stimulate home buying.

In response to a journalist’s question about how mass deportations could impact labor markets and inflation, Powell explained that the Fed employs extensive modeling to examine various policy outcomes, drawing on past reports to illustrate their approach while keeping an eye on the wide range of potential economic scenarios.

CoreLogic’s chief economist, Selma Hepp, observed that the Fed’s pause on rate cuts could benefit the new housing market, which has been outperforming the existing home market recently.

She indicated that the economy appears resilient against long-term challenges, suggesting there isn’t immediate pressure for the Fed to cut rates further.

With persistently high mortgage rates and limited housing inventory, existing home sales are indeed slowing.

In contrast, new home builders are increasing their offerings and actively providing incentives like rate buydowns, keeping their sales strong.

Source: Housingwire