The Fed has disclosed little in recent meetings. (iStock)
federal reserve system stayed the courseannounced that it would do nothing about interest rates, but would still start lowering them later this year.
The central bank announced Wednesday that it would keep the federal funds rate at 5.25% to 5.5%. Fed officials expect at least three rate cuts in 2024, but now expect one less rate cut in 2025, a revision from their December forecast.
Latest inflation data shows prices rose 3.2% in February due to housing inflation and rising gas prices. Fed Chairman Jerome Powell said the Fed will continue to monitor inflation and other economic indicators to determine when to cut interest rates. Powell explained that cutting rates too early risks a rebound in inflation, while cutting rates too long poses risks to economic growth.
“We believe our policy rates are likely at the peak of this tightening cycle, and if the economy continues broadly as expected, it would be appropriate to begin reducing policy restraint at some point this year,” Powell said. It’s very likely.” statement. “However, the economic outlook remains uncertain, and we remain very mindful of inflation risks. We remain prepared to maintain our current target range for the federal funds rate for an extended period of time, if appropriate.” Stated.
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Housing inflation remains high
Although inflation has slowed in most parts of the economy, housing inflation remains high. High home prices and mortgage rates continue to keep home buyers out of the market. Ultimately, this scenario should improve as market rent increases decline over time, Powell said.
Mortgage interest rates continue to hover between 6.5% and 7%. To significantly lower mortgage borrowing costs, the Fed would need to lower interest rates. Thelma Hepp, chief economist at CoreLogic, said the Fed is likely to hold off on cutting interest rates until at least June or later if the economy remains strong.
“Demand for new home sales continues to be a positive for the mortgage industry as homebuilder confidence continues to rise,” said Hepp. “However, most major housing markets are facing even more anemic conditions than the typical spring home buying season.”
Beyond new home sales, a series of government initiatives recently unveiled by the Biden administration are expected to extend a lifeline to the struggling housing market. President Joe Biden has called on Congress to invest more than $175 billion in affordable housing efforts, according to the White House. statement.
In his State of the Union address earlier this month, Biden called on Congress to enact legislation that would provide a $10,000 tax credit to first-time homebuyers and those selling their first homes. The move would help middle-class Americans cope with high borrowing costs, while also encouraging existing homeowners to sell more of their homes.
“We look to the government to support homebuyers through a series of incentives, including the proposed Homebuyer Tax Credit,” said Max Slyusalczuk, CEO of A&D Mortgage. said. “While these policies will certainly stimulate sales a little, they won’t miraculously turn the industry around. To do that, the Fed will need to meaningfully lower interest rates.”
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Prices remain high for a long time
Michele Ranelli, vice president of U.S. research and consulting at TransUnion, said the Fed’s decision to keep interest rates high for an extended period of time is putting a strain on consumers’ wallets and the amount they pay to borrow.
According to a recent TransUnion report, credit card balances will surpass the $1 trillion mark for the first time in the fourth quarter of 2023. While Americans charged more on their cards, unsecured personal loan balances also rose in the fourth quarter. Retail origination balances exceeded $245 billion, up from $222 billion a year ago.
“While inflation continues to trend towards more normal levels, today’s Fed decision will keep interest rates at current levels with any potential cuts occurring in the second half of 2024,” Ranelli said. Stated. “This means that U.S. consumers, who continue to face relatively high interest rates across a variety of credit products, will have to wait at least a little longer before interest rates ease. The impact is real and will continue to be felt.”It will likely be slow to take hold. ”
Ranelli said if interest rates were lowered, consumers could consider refinancing high-interest debt into lower-interest credit products to reduce their balances.
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