By PATRICK LAVERY
Seven weeks ago, the 2023 slate of policy meetings for the Federal Open Market Committee concluded with members voting to leave the key interest rate unchanged for a third straight time. However, anyone hoping that 2024 will begin with some movement in a downward direction is likely to be disappointed this week.
Despite a seemingly positive economic outlook that has the stock market soaring to record highs, the experts seem to agree that there will be no change made when Federal Reserve Board Chairman Jerome Powell emerges from the FOMC meeting on Wednesday.
The stability, so to speak, of the Fed’s policy interest rate has been mirrored somewhat in the housing market recently. According to Freddie Mac, the 30-year fixed-rate mortgage inched up to an average of 6.69% as of last Thursday, compared to 6.60% the week prior, while the 15-year rate increased to 5.96% from 5.76%.
Freddie Mac chief economist Sam Khater addressed the correlation between mortgage rates and the bigger picture of the Fed in a statement.
“Given this stabilization in rates, potential homebuyers with affordability concerns have jumped off the fence back into the market,” Khater said, adding that despite anticipated home price hikes and inventory issues, homebuying is expected to improve this spring.
That could coincide nicely with the Fed potentially electing to deescalate matters for what would be the first time in two years. While the CME Group’s FedWatch tool suggests standing pat is a near certainty this week, estimating the probability that no change will be made to the key rate at nearly 97%, there is much more optimism for the next FOMC meeting in late March.
At that time, the tool indicates, the chances of the Fed holding steady once again or bumping down a quarter of a percentage point approach 50-50 – 52.3% that the current 5.25% to 5.5% range will be maintained, and 46.2% that it will be reduced to 5% to 5.25%. There is even a 1.4% chance on the board for a drop of a full half-point, from 4.75% to 5%.
Investopedia reported that Michael Gapen, U.S. economist for Bank of America Securities, wrote in a commentary that his staff thinks the first rate cut is indeed coming in March.
However, there are tea leaves suggesting that might still be too optimistic.
Earlier this month, as covered by Forbes, Fed Governor Christopher Waller said in a speech that he was “becoming more confident that we are within striking distance” of getting to 2% inflation, the Fed’s long-stated reasoning for the series of interest rate increases that began in early 2022. But he wouldn’t put too fine a point on when the rate would start to ramp down again.
“As long as inflation doesn’t rebound and stay elevated, I believe the FOMC will be able to lower the target range for the federal funds rate this year,” Waller said, while adding to that vague prediction, “I see no reason to move as quickly or cut as rapidly as in the past.”
Furthermore, the U.S.’s global counterparts appear to be making the same series of cautious choices. According to Barron’s, the European Central Bank also held the line on its interest rates last week, with ECB President Christine Lagarde saying that while they’d likely reached their peak, it was “premature” right now to discuss cuts which still may be months away.
Indeed, “determining the optimal timing” to make a move is now the Fed’s unique challenge, Realtor.com economist Jiayi Xu told Yahoo!, saying there are potential negative economic impacts if the “current restrictive policy” goes on much longer.
Reuters reports that traders predict the first rate cut to be made at the April 30–May 1 meeting, a somewhat residual response to the wiggle in inflation over the December shopping season – the personal consumption expenditures price index increasing 2.6% last month over a year earlier, while underlying inflation measured in both three- and six-month annualized periods is now falling below the Fed’s 2% benchmark.
Has the Fed pulled off its sought-after soft landing?
If so, the main question for the housing market then is, how quickly will prospective buyers respond when action is finally taken? Investopedia describes the current climate as a “state of deadlock,” because while the key Fed rate does not functionally change any other rates, it informs every interest rate decision across the country from mortgages to car loans to credit cards and business loans.
CBS MoneyWatch suggests that the time is now for homebuyers to go mortgage rate hunting, making the point that those rates have already gone down meaningfully in the last several months, and while they could decline further once the Fed rate finally falls, there’s no telling when that may happen.
Expanding on that, CNET recommends comparing offers from different lenders. Gregory Heym, chief economist at Brown Harris Stevens, points out in that piece that the federal funds rate is a short-term “overnight” figure – and that the best move in the long term is to buy a home you love now, then refinance when rates are lower.
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