Rate Watchers To Keep Close Eye On The Fed

By PATRICK LAVERY

After a swift acceleration of more than five percentage points in about a year and a half, starting in early 2022, could the Federal Reserve Board keep its policy interest rate in a holding pattern for close to a year?

That appears likely, as with no change since last summer, most experts feel the Fed is poised to keep the key rate steady – at a range of 5.25% to 5.5% – when the Federal Open Market Committee emerges from its next two-day summit on Wednesday.

CME Group’s FedWatch tool has been a valuable resource for Fed meeting predictions in recent months, and once again, its degree of confidence that the Fed will stand pat this week is high. The tool projects the chances the federal funds rate will remain the same at 97.3%, with the excess 2.7% pointing toward a rate cut.

What may be worrisome for those who may wish to see officials finally move the needle in a downward direction is that, in contrast to the tool’s mechanism just prior to previous meetings, this time the probability of a reduction is not swinging close to a 50-50 shot at what will be the next Fed gathering, scheduled for June 11-12.

At that time, the tool still sees it as 88.4% likely that rates will be held in check, a number that falls only to about 70% by the next meeting after that, at the end of July.

Not until the mid-September meeting does this prediction model now expect policymakers to finally ramp things down.

However, at the risk of overreliance on just one measure, there seems to still be a glimmer of hope that cuts could happen fast and furious between then and the end of 2024. After all, Federal Reserve Chair Jerome Powell and his colleagues had at one time predicted that three such cuts would be made this year.

The hesitation remains to be tied to inflation, and its slow trickle toward the Fed’s long-stated and long-awaited goal of 2%. It’s still a long way from that, for now, at about 3.5% year over year in March.

Nationwide Senior Economist Ben Ayers said, as reported by Investopedia, that the September meeting now looks like the earliest feasible opportunity for movement in a positive direction, at least as far as the key rate is concerned.

There are somewhat darker corners of opinion; Anna Wong, Stuart Paul, Eliza Winger, and Estelle Ou, economists for Bloomberg, were quoted in a Business Standard piece saying they expect a “hawkish pivot” from Powell – meaning he might not only suggest fewer cuts over roughly the second half of 2024, but perhaps none at all until 2025.

So where does all of this information leave the consensus on mortgage rates?

As always, the movement of the federal funds rate does not directly dictate which way mortgage rates will turn, although the two are inevitably intertwined. Right now 30-year mortgage rates, as reported by CBS News MoneyWatch, have already jumped from 6.82% at the beginning of April to 7.29% as the month draws to a close, a signal that those looking to buy a home may want to lock in their rate prior to closing.

However, as that same article points out, that approach does have its unique downsides.

Another MoneyWatch article, meanwhile, surveys some expert predictions of how mortgage rates will fare following this week’s Fed meeting, giving several scenarios. Michelle White, national mortgage expert for The CE Shop, tells CBS News that the change could be ever so slight, at least in the grand scheme, perhaps to the tune of a 0.125% to 0.25% reduction. White foresees an overall 1% drop in mortgage rates before 2024 ends.

Others don’t see the picture quite so rosy. In two other scenarios set forth by other experts, mortgage rates either won’t drop until June (White’s vision has them decreasing directly in response to the April-May meeting), or won’t budge at all until the calendar turns to 2025.

And not to invite doom and gloom, but there is a “worst-case” scenario for lack of a better term, in which the Fed actually raises the key interest rate instead of lowering it, or even holding the line.

Forbes reported that Federal Reserve Governor Michelle Bowman said as much back on April 4, saying that if inflation continues to stagnate, or move further away from the 2% target, the risk of a further tightening of policy and increase in the policy rate is possible.

That actually happened in March, with the 3.5% inflation figure actually representing a jump of three-tenths of a point compared to February, but it is unclear if that is enough of a recoil to force a negative outcome on Wednesday.

The best advice for everyday Americans seems to be: Know what kind of mortgage you are getting yourself into, or even which one you already have. If it’s an adjustable rate mortgage, you know that you may expect to see costs rise. And if you are considering locking in your rate on a new purchase, be aware of the deadlines inherent with making that decision.

It is expected that the FOMC will publicize its latest policy ruling around 2 p.m. ET on Wednesday (May 1), with Powell scheduled to address the media shortly thereafter. Many rate watchers look to those remarks not only as an explanation of the Fed’s current thinking, but also as the earliest indicator of what future decisions may be, and when those decisions will be made.