Watching And Waiting For The Fed’s Next Move

By PATRICK LAVERY

When the Federal Open Market Committee meets this week analysts will be looking for signs of what’s next and it may be anyone’s guess.

At the Mortgage Bankers Association’s annual convention and expo in Philadelphia this month, MBA Chief Economist Michael Fratantoni told attendees that they expect the Feds will maintain the federal funds rate target range and do not expect an increase from them again this year.

Fratantoni projected there will be at least two cuts in 2024, and possibly more in 2025. But then Patrick Harker, the president and CEO of the Federal Reserve Bank of Philadelphia, took the stage the next day and said rates may have to stay high in order for them to reach their overall goals on inflation.

Although the chances of a rate hike are “effectively zero” and it’s “virtually certain” that officials will hold rates at their current 5.25% to 5.5% range this week, there are shades of doubt about what may happen going forward. According to a Business Insider report, members of the FOMC appear to be divided on their next steps.

Forecasters have been reviewing every word Chairman Jerome Powell says, hoping for clues.

On Oct. 19, Powell spoke at the Economic Club of New York luncheon.

Powell said financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening.

“We remain attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy,” Powell said.

Powell also said that persistently above-trend growth and a robust labor market “could put further progress on inflation at risk and could warrant further tightening of monetary policy.”

So what is the most likely scenario going forward?

The CME Group’s FedWatch Tool, available online, reports a 96.1% chance that after this meeting the target range will remain between 525 and 550 basis points. That’s not quite “effectively zero,” but the remaining 3.9% odds are placed on the rate being bumped back down – much less of a certainty – to between 500 and 525 points.

At the Dec. 12-13 meeting, everything could change. The tool currently says the odds the range will be increased again sits at just under 1 in 4, 24.2%.

Simply translated, at 5.25% to 5.5%, the federal funds rate is now the highest level in more than two decades and 5 1/4 percentage points higher than at the beginning of 2022. And it’s not going to go down in 2023.

Those who work in the housing market are urging Powell and his colleagues to loosen the reins.

In a jointly signed letter dated Oct. 9, the Mortgage Bankers Association, the National Association of Realtors, and the National Association of Home Builders asked the Fed to make “two clear statements” to the market, that it is not contemplating further rate hikes, and that it will cease selling off mortgage-backed securities as it has been doing “until and unless” the housing market has stabilized.

The MBA, NAR, and NAHB said the concern among their collective members is “profound.” Activity, they said, is down to its lowest levels since 1996 as mortgage rates reach a 23-year high.

That trend is unprecedented “in the absence of larger economic turmoil,” the letter said.

Crunching the numbers, they estimated homebuyers across America are paying an extra $245 per month on an average $300,000 mortgage.

“Housing activity accounts for nearly 16% of GDP according to NAHB estimates,” the letter said. “We urge the Fed to take these simple steps to ensure that this sector does not precipitate the hard landing the Fed has tried so hard to avoid.”

The FOMC’s latest ruling on monetary policy will be released in the early afternoon Wednesday with Powell’s remarks to follow soon after.

Editor Kimberley Haas contributed to this article.

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