Deflation is happening, but the Fed wants to wait for more evidence to lower interest rates. (iStock)
The central bank said on Wednesday it would keep the federal funds rate in a range of 5.25% to 5.5%, the same as it has been since July last year.
The decision was not unexpected and comes amid a positive trend in several economic indicators. Wednesday’s inflation report showed inflation rose 3.3% in the 12 months to May, while core CPI rose 3.4%, beating expectations. Federal Reserve Chairman Jerome Powell said the report creates confidence that inflation is heading toward the 2% target, but said more evidence is needed before the central bank begins easing policy.
“So far this year, the data doesn’t give us a lot of confidence,” Powell told reporters. Press conference“However, recent inflation readings have been more favorable than earlier in the year and have shown some further progress towards the inflation target.”
“We recognize that removing policy restraints too soon or by too much could reverse the gains we have made in improving inflation,” Powell said. “At the same time, removing policy restraints too late or by too little could overly weaken economic activity and employment.”
Treading cautiously means interest rates are likely to remain high for a long time, with little chance of a rate cut before the end of the summer.
Chairman Powell said that while interest rate cuts are expected to be fewer this year than initially expected, the pace of cuts will likely accelerate next year as long as economic data supports this direction. The Fed’s quarterly economic outlook summary forecasts one rate cut this year, with the federal funds rate projected to be 3.1% by the end of 2026.
“If the economy is strong and inflation persists, we are prepared to maintain the current target range for the federal funds rate for an appropriate period of time,” Powell said. “If the labor market weakens unexpectedly or inflation falls more quickly than expected, we are prepared to respond. Our policies are adequate to address the risks and uncertainties we face as we carry out our twin mission.”
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Mortgage rates still expected to fall
Chairman Powell said the best thing the Fed can do for the housing market is to cut interest rates. Mortgage rates have risen largely in tandem with interest rates, and easing policy would likely help lower borrowing costs. But even without a rate cut, mortgage rates have already started to fall and are expected to continue to do so this year, according to the Mortgage Bankers Association.
“May’s inflation data beat expectations, but perhaps surprisingly, the FOMC now expects only one rate cut in 2024,” said Mike Fratantoni, MBA senior vice president and chief economist. “However, it is notable that the dot plot indicates the close margin of one or two rate cuts. Tight labor markets, again highlighted by May’s employment data, will likely lead many members to remain cautious about cutting rates until we see a consistent decline in inflation.”
“Today’s announcement leaves our mortgage rate forecast unchanged,” Fratantoni continued. “We still expect mortgage rates to fall to approximately 6.5% by the end of 2024.”
Rising borrowing costs are just part of the homebuying challenges facing homebuyers. Powell said lower interest rates would help ease the burden on homeowners currently living off low mortgage rates, but they wouldn’t eliminate the inventory shortage that’s driving home prices to historic highs.
“If home prices remain strong, the Fed may consider cutting interest rates later this year to spur home-buying activity,” said Victor Kuznetsov, founder of investment firm Imperial Fund. “Some speculate that a cut could come as soon as September, but if the economy continues on its current trajectory, a cut won’t come until the end of the year.”
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The Fed’s policy of keeping interest rates high until there are clear signs that inflation is subsiding means that consumers will continue to bear the brunt of high borrowing costs for auto loans, credit cards and personal loans.
Despite the challenging environment, consumers continue to show interest in credit cards. Trans Union Report The company said the total number of bank cards held by consumers in the first quarter of 2024 will exceed 543 million, up 20 million from a year ago and more than 88 million from just three years ago. Utilization of available credit is also on the rise, with balances up 2.2% from last year. The average credit limit for new accounts increased 3.8% to $5,628.
“Consumers continue to seek credit to help them cope with rising prices for everyday items,” said Charlie Wise, senior vice president and head of global research and consulting at TransUnion.. “Interest rates continue to rise, which means the cost of that loan will continue to rise over the long term, so it’s important that consumers strive to only take out loans that they know they can afford to make the regular monthly payments. Keep in mind that as interest rates rise, minimum payments on the same amount of debt will likely also increase.”
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