For just the second time in 19 months, the Federal Reserve chose today to meet without raising interest rates, leaving the federal funds rate as is even as the economy—and specifically, a very vulnerable housing market—shows signs of weakness.
But the central bank made it clear it still expects to raise rates again this year, and keep rates higher for longer—a worrying sign for housing in the medium term and indicative that the Fed still doesn’t see the fight against inflation as finished.
“What we decided was to maintain the policy rate and await further data,” said Fed Chair Jerome Powell in a press conference following the meeting. “We’ve seen progress, and we welcome that, but we need to see more progress before we’ll be willing to reach that conclusion.”
The median projection for where the federal funds rate will be at the end of next year was 5.1%, up from a 4.6% median the last time members updated economic expectations in June. Some economists had predicted—or at least hoped—that the Fed would begin cutting rates as early as the spring.
Expectations for unemployment and inflation were mostly unchanged in the Fed’s projections, with Fed members anticipating that inflation will reach their long-term target of around 2% by the end of 2025.
At the same time, though, the Fed revised its predictions for GDP growth upward, reflecting more optimism for a “soft landing” and a return to normalcy without a recession.
The decision comes at a time when the labor market is finally showing signs of cooling off and mortgage rates are threatening to undermine a surprisingly resilient housing market.
Economists in the real estate space have continued to call for an end to rate hikes, arguing that the housing industry is in a precarious position and that lags in inflation data obscure a sunnier outlook on prices.
“Even with today’s pause, the aggressive rate hikes have had major and somewhat deferred impacts on the housing market,” said Dr. Lisa Sturtevant, Bright MLS chief economist, in a statement.
Powell cautioned that the new expectations were still just that—expectations, and that they shouldn’t be viewed as “a plan” for how the central bank was approaching rate hikes going forward.
“What it reflects though, is that economic activity has been stronger than we expected—stronger than I think everyone expected,” Powell said. “What you’re seeing is, this is what (Fed members) see as of now.”
For those waiting for mortgage rate relief, the news might not be all bad, despite the potential for a longer period of restrictive rates. Mike Frantantoni, SVP and chief economist for the Mortgage Bankers Association, said that 2024 could still see significant improvements to the housing market.
“We expect that inflation will continue to drop closer to the Fed’s target, the job market will continue to slow, and that mortgage rates should begin to reflect that the Fed’s moves in 2024 will be cuts—not further increases,” he said in a statement. This should provide some relief in terms of better affordability for potential homebuyers.”
But Sturtevant said the damage might already be done, as affordability becomes the number one concern for housing, with little chance of short-term relief on other fronts.
“The biggest downfall of the market cooling is that many individuals and families—particularly first-time homebuyers—have been priced out of the market as a result of the Fed’s aggressive rate increase,” she said.
Dr. Selma Hepp, chief economist at CoreLogic, added another potential worry—that the Fed might be slow to react to new data, just as they were as inflation began rising back in 2021.
“Once the labor market begins to soften, the Fed will look to reduce rates again sometime next year,” she claimed. “But just as the Fed was quick to raise rates, my concern is that they may react too slowly when it comes time to lower rates.”
