Fed Requires ‘Continuing Evidence’ of Inflation Decrease Before a Rate Cut

As expected, the Federal Reserve indicated that rate cuts aren’t in proximity unless there is “continuing evidence” revealing inflation is decreasing toward the Fed’s 2% goal, as stated by Fed Chair Jerome Powell in a press conference after yesterday’s meeting.

Inflation has, however, “eased from its highs without a significant increase in unemployment,” said Powell—a positive takeaway.

While price stability still remains the hope, interest rates have stayed stagnant for the past four meetings, and the federal funds rate will remain between 5.25% and 5.5% for the time being.

In a statement, the Fed said, “In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”

This past December, officials were convinced that rates could be cut three times in 2024 if inflation continued to decline, but still, to no avail. The Fed and industry experts alike are still persistent in believing that rate cuts are bound to occur at some point this year, but not in March like once predicted, given that inflation is lowering at a rate quicker than most expected—and the job market remains relatively strong.

“We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” said Powell.

Mortgage Bankers Association (MBA) Vice President and Chief Economist Mike Fratantoni believes there will be rate cuts this year, and this will be the Fed’s next move, saying in a statement, “Inflation is dropping faster than many had anticipated, and the job market thus far is holding up quite well. This combination should mean its next move will be a cut in order to prevent the real fed funds rate from becoming overly restrictive, thereby increasing the risk of a sharper economic slowdown. We continue to expect a first cut at the May meeting, with three cuts in total this year.”

It is worth noting that rates, if cut too early or late, could be detrimental to the economy. The Federal Reserve faces the pressing task of balancing what inflation’s slowdown could present, with the concern that its 11 prior rate hikes might unintentionally exert pressure on the economy, ultimately leading to spiked unemployment.

Regarding the influence on housing, National Association of REALTORS® (NAR) Chief Economist Lawrence Yun feels that home sales will “no doubt” rise this year.

“As anticipated, the Federal Reserve did not alter its short-term interest rate today, keeping it at 5.375%. The Fed did, however, indicate the likelihood of several cuts later in the year. The bond market, including mortgage-backed securities, has already lowered the longer-term interest rates in anticipation of the Fed’s future policy. Let’s recall that before the COVID-induced economic lockdown, the Fed funds rate was near 2%, and the 30-year fixed mortgage rates were at nearly 4%. We will not return to this level this year or next year,” said Yun in a statement. “The budget deficit remains high, and the various inflation metrics remain above the comfort level. That means the mortgage rates will likely be in the 6% to 7% range for most of the year. This current rate is lower compared to the high of 8% a few months ago, which is helping to improve housing affordability. More homebuyers will return to the market. Many delayed homesellers may be willing to give up 3% – 4% rates as life circumstances have changed, thereby boosting inventory. Home sales will no doubt rise this year.”

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