Projections For Monetary Policy Show No Rate Changes

By PATRICK LAVERY

Americans were just putting away their families’ Halloween costumes the last time the Federal Reserve Board made an announcement on monetary policy, holding the federal funds rate at a range of 5.25% to 5.5%. Now the nation is well past Thanksgiving and fully focusing on the holiday season and the new year ahead.

But even as the seasons change, most experts expect the Fed to once again refrain from taking any action at this week’s Federal Open Market Committee meeting, slowing a trend of 11 rate hikes since early 2022.

The CME Group’s FedWatch, a forecast of interest rates based on Fed funds futures trading indicators, currently hedges a 98.4% chance that the FOMC will vote to maintain its key rate at its current level when it emerges from its two-day huddle on Wednesday.

Troy Williamson, Cornerstone Home Lending senior loan officer, strongly concurred with that consensus in a statement provided to The Mortgage Note.

“I certainly anticipate that with the recent numbers continuing to support a decline in inflation, as well as recent employment-related information supporting a softening in the labor market, we will definitely not see any increase in the Fed funds rate at the current time,” Williamson said.

When will rates start to go down?

Earlier this month, Federal Reserve Chairman Jerome Powell cautioned against a premature look forward to rate cuts in 2024, following those rates reaching their highest levels in more than two decades over the last two years.

But National Association of Realtors Chief Economist Lawrence Yun urged those discussions to start happening, at least in theory, before 2023 draws to a close.

“Living standards slightly increased (in November) as the consumer price inflation was 3.2%,” Yun said, citing a figure still more than a percentage point higher than the Fed’s stated goal of 2%. “The higher wage gains of 6% during last summer were wiped away by 9% inflation. So, softer wages will help move the overall inflation rate lower. This also means the Federal Reserve must consider a rate cut or two—or three—in 2024.”

With specific regard to the housing market, which Powell and his team have dutifully tracked in every one of their policy meetings this year, Yun said the labor force (and how much they are getting paid) has a synergistic effect.

“Mortgage rate movements may determine entry timing, but jobs are the source of long-term housing demand, which keeps growing,” Yun said.

For his part, Williamson hopes for clearer direction from the Fed on future rate cuts but realistically is expecting “much of the same” at midweek.

He said both the FOMC’s statement, and Powell’s comments thereafter, will be interesting to monitor.

“At this point, I believe the conversation is going to shift from additional rate hikes to focusing on how long we stay at the current interest rate levels, and when will the Federal Reserve start cutting rates. There are many mixed views on when these cuts may happen, ranging from the first quarter of 2024 to the third quarter,” Williamson said.

Spoiler alert… there may not be a rate cut by the Feds until after the second quarter of 2024.

In an interview with MarketWatch, Mike Sanders, Madison Investments head of fixed income, suggested that the Q3 outcome appears more likely.

“I think the market is a little too aggressive in terms of thinking that cuts are going to occur in March,” Sanders said.

Of course, what the Fed decides on Wednesday does not have a direct nor mandatory effect on mortgage rates, but is one of the main trendmakers that shapes the market going forward.

A report by Investopedia estimated that housing will become “a bit” more affordable in 2024 — but how much is a bit in this case? Only about 5% less expensive, the experts say.