The Federal Reserve’s Federal Open Markets Committee (FOMC) held its short-term policy interest rate steady at a range of 5.25% to 5.5% at its first meeting of the year on Wednesday.
The decision falls in line with the stance taken by central bank officials in recent meetings, where they maintained the status quo while deliberating the possibility of future rate cuts.
In 2023, the Fed hiked the benchmark federal funds rate by a quarter point at four meetings while pausing at four other meetings.
Fed Chair Jerome Powell remained cautious in his tone during Wednesday’s press conference, so much so that he refused to use the phrase “soft landing” to describe the U.S. economy.
“We are prepared to maintain the current target range for the federal funds rate for longer if appropriate,” Powell said. “As labor market tightness has eased and progress on inflation has continued, the risks to achieving our employment and inflation goals are moving into better balance.”
“We know that reducing policy restraints too soon or too much could result in a reversal of the progress we’ve seen on inflation, and ultimately require even tighter policies to get inflation back to 2%.”
At the same time, Powell also acknowledged the risks of reducing the federal funds rate too late or too little, which could unduly weaken economic activity and employment.
Until the rate-setting body’s next meeting in March, the committee will carefully assess the incoming economic data, starting with Friday’s jobs report.
Economy, but not housing, has weathered hikes well
Despite the Fed’s hawkish rate-hike campaign, consumer spending remained sturdy and the economy expanded at a surprising 3.3% annual rate in the fourth quarter. Inflation has decreased faster than expected and the labor market remained resilient with a sub-4% unemployment rate as job openings still outweigh unemployed workers.
But only 4.09 million existing homes were sold in 2023, the lowest rate since 1995. Elevated mortgage rates and a lack of housing inventory, among other factors, put a damper on housing activity last year. On the bright side, home buyers are starting to get some relief in 2024. After a sharp easing at the end of 2023, mortgage rates have started to stabilize in early 2024. The Freddie Mac mortgage rate index showed the 30-year fixed rate averaging 6.69% as of Jan. 25.
“The combination of strong consumer demand and somewhat lower mortgage rates should support a more robust spring housing market this year,” Mortgage Bankers Association senior vice president and chief economist Mike Fratantoni said in a statement.
In a letter dated Jan. 28, Sen. Elizabeth Warren of Massachusetts and three Democratic colleagues (Colorado’s John Hickenlooper, Nevada’s Jacky Rosen and Rhode Island’s Sheldon Whitehouse) urged Powell to lower interest rates to help bring down housing costs.
When will the Fed start to cut rates?
Investors expect rate cuts to begin as soon as May, according to Realtor.com chief economist Danielle Hale. The National Association of Realtors expects the Fed to cut interest rates four times in 2024, while the MBA expects three rate cuts.
In addition, the FOMC also reiterated its goal to reduce its holdings of Treasury securities, agency debt and agency mortgage-backed securities.