Rate Hike Pause Predicted, Investors Watching Closely For End Of Year Indicators

By PATRICK LAVERY

With the end of the third quarter of 2023 in sight, indications are that the Federal Reserve will pause hiking its federal funds rate this week – as it did in June before again raising the target range in July – and investors will be watching closely on Wednesday to see if Chairman Jerome Powell gives any indication as to what they might do to end the calendar year.

The FOMC’s course of action, while holding no direct bearing on mortgage rates, acts as a strong indicator of what direction those rates will go in next. According to Business Insider, a pause on the part of the Fed won’t do much to move mortgage rates, currently above 7%, but other extemporaneous factors might.

“What the market will be looking at strongly is the verbiage in their statement at the culmination of their meeting, as well as comments made by Jerome Powell in the press conference on Wednesday,” Troy Williamson, a senior loan officer with Cornerstone Home Lending, told The Mortgage Note.

Williamson concurred with the apparent consensus that the Fed’s key rate will be left alone this time. The upper limit of the target range ballooned as of the July hike to 5.5%, the highest figure since 2001.

“Ultimately the market will be looking for any clues of what the Fed may do moving forward for the remainder of the year and the potential chances for an additional rate hike at their meeting in November,” Williamson said.

Reuters reported that this week’s meeting comes on the heels of the Sept. 15 monthly options expiration, which according to an analysis by Nomura has prompted a drop in the S&P 500 in the week following the expiration in 26 of the last 33 years, adding pain to already-soft “September effect” stock market returns.

And there may be signs that the parade of rate hikes over the better part of the last two years could finally be having a tangible impact on the labor market, with Forbes reporting that the unemployment rate across the United States in August rose to 3.8%, its highest mark since February 2022 when the hikes began, despite hiring numbers last month that exceeded expectations.

In August, amid an eight-week break between FOMC meetings, Powell was quoted in a U.S. News & World Report article with an all-too-familiar tone: that of the Fed’s dogged determination to bring inflation down to 2% without sending the country into recession.

“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,” Powell said.

National Association of Realtors Chief Economist Lawrence Yun said in a statement last week that consumer price inflation upturned slightly to 3.7% in August, following a dip to 3.3% in July, but the trend line remains where the Fed wants to see it going – even if no one is satisfied with the speed at which it’s happening. And what’s more, he added, an impending “sharp deceleration” in overall shelter cost, or rent, should keep inflation moving downward.

“Overdoing the rate hikes, considering that inflation is likely to calm, will unnecessarily damage the economy,” Yun said.

Additional data provided in Yun’s statement included a 7.3% year-over-year increase in rents in July, but a monthly gain of just 0.29%, which was the slowest in two years (even slower, he said, in the private sector alone), and correlates to a 3.5% annualized rate increase.

For those who want to buy a home now, what does the anticipated action, or lack thereof, really mean?

“We had been hoping that mortgage rates would improve a bit before the end of this year but I am not sure that we see that now,” Williamson said. “I feel that it will likely be beyond the first quarter of 2024 before we see any meaningful improvement in rates. Once rates do make some meaningful moves lower, that should spur additional activity in the purchase market as it may bring more buyers to the market who had been on the fence.”

Williamson added that he hoped lower rates would also free up a bit of the logjam on inventory, as those who currently own homes and have built equity would be less likely to move if their next purchase stands to be at an interest rate 2% to 2.5% higher than their current one.

“In regards to commercial lending, with rising borrowing costs for banks being passed on to the commercial consumer as well as tighter credit requirements, I imagine that commercial lending will continue to feel the impact of the current lending environment until we see rates move lower,” he said.

The Federal Open Market Committee meeting convenes Tuesday, with a policy decision to be released early Wednesday afternoon followed by Powell’s commentary.