Fed held off on further rate increases at its latest gathering.
The Federal Reserve announced a third interest rate pause during its December meeting on Wednesday, leaving the federal funds rate at a 22-year high of 5.25% to 5.5%. It indicated that it could begin dialing back its restrictive monetary stance by next year.
The central bank reiterated its commitment to bring inflation to a 2% target rate in a statement. The Fed also said it anticipated that tighter financial and credit conditions for households and businesses would weigh on economic activity, hiring and inflation.
On an annual basis, prices rose 3.1% in November, down from 3.2% growth last month and in line with economists’ expectations, according to the Consumer Price Index (CPI) released earlier in the week by the Bureau of Labor Statistics (BLS). Core inflation, which excludes more volatile food and energy prices, held steady at a still high 4%. However, shelter costs, which contributed to roughly 70% of price gains, are expected to drag down overall inflation increasingly.
The consensus is that the Fed is likely now done with increases following December’s decision to hold rates steady. The question is, how long will it keep rates elevated?
Fed officials predicted rate cuts to come as early as next year, with interest rates expected to tick down to 4.6%, according to the central bank’s updated economic forecasts in its Summary of Economic Projections (SEP).
“If the economy evolves as projected, the median participant projects that the appropriate level of the federal funds rate will be 4.6% at the end of 2024, 3.6% at the end of 2025, and 2.9% percent at the end of 2026,” Fed Chair Jerome Powell said in a statement. “These projections are not a Committee decision or plan; if the economy does not evolve as projected, the path for policy will adjust as appropriate to foster our maximum employment and price stability goals.”
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Housing market is more optimistic
The Fed’s interest rate decision has created more optimism for a housing market beset by high mortgage rates and home prices. The December pause nowhere near solves the market’s affordability crisis, but there is hope that it will support the slow decline of mortgage rates currently underway. The 30-year mortgage slipped to 7.3% after nearly topping 8% six weeks earlier.
“The Federal Reserve’s decision today marks two important milestones,” CoreLogic Chief Economist Dr. Selma Hepp said. “The first is that the Fed confirms that it believes its actions helped tame inflation while also preventing the economy from slipping into recession. The second is that housing can begin the slow process of returning to a more normalized rate environment.
“However, we expect it will be several months before housing returns to smoother sailing and there may yet be some choppy waters ahead,” Hepp continued.
Realtor.com economists predict that mortgage rates have declined over the past five weeks and will slide into the 6% territory in 2024. Fannie Mae expects mortgage rates to decline gradually over the next two years, reaching 6.9% for the 30-year mortgage by 2025. At the same time, First American economists noted that mortgage rates will hover in the 6.5% to 7.5% range.
“Mortgage rates remain high and while potential buyers bear the brunt of higher rates, many would-be sellers note the sharp difference between current rates and the all-time lows under 3% reached just three years ago,” Realtor.com Chief Economist Danielle Hale said.
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Rate reduction could spark a refi boom
Homeowners currently making payments on high-interest mortgage loans will likely be among the first to take advantage of a rate reduction. Refinancing could immediately put real money into their pockets, according to Michele Raneri, the vice president of U.S. research and consulting at TransUnion.
If interest rates dropped to 5.5%, these homeowners stand to save nearly $300 a month through refinancing, resulting in an average monthly payment of $1,917, a reduction of $284 every month.
“With today’s announcement of a continuation of the pause on interest rate increases by the Fed, it is hopeful that we are one step closer to an eventual reduction in interest rates,” Raneri said. “A reduction in interest rates could not only help in stimulating the mortgage origination market, but could also provide an opportunity for millions of consumers who have recently taken on high interest mortgages to refinance and see significant impacts to their monthly budgets.”
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