What the June FOMC meeting statement said
The Federal Reserve’s Open Market Committee (FOMC), the rate-setting body that meets roughly eight times per year, left the short-term policy rate unchanged at a range of 5.25 to 5.5 percent. In July 2023, the Fed raised rates for what was widely believed to be the last time in this tightening cycle which began in March 2022. Although recent inflation and labor market data have raised questions about whether additional increases in the Fed’s rate are necessary, I still expect the current rate to be sufficiently restrictive to bring inflation back to 2%, and updated economic projections suggest that Fed decision makers agree.
There are ample data points for both sides to factor into the debate. On the one hand, a surprisingly large number of workers were hired in May and earnings growth ticked up somewhat, which points to the need for the policy rate to at least remain higher a little longer, if not increase. On the other hand, the unemployment rate reached 4%, its highest level since January 2022, and job openings shrank dramatically in April.
Inflation is the key to watch
Inflation remains stubborn, despite its improvement in May, with rising housing costs continuing to contribute a significant amount to overall price increases. The Fed has made progress toward its 2% target, and shelter inflation is likely to continue to wane in the near-term, driving further improvement ahead. However, the Realtor.com May Rental data show that total rent declines have tempered nationwide as market-by-market trends have been mixed with some areas seeing rent growth. This data points to a risk of slowing disinflation or a stall in inflation ahead that could complicate the Fed’s policy decision if it occurs before the 2% target is achieved. At the same time, these trends underscore the need for more housing construction to address the long-standing shortage and better anchor home and rent prices.
Fed projections signal caution on inflation
The updated economic projections show that the median Fed projection anticipates just 1 rate cut by the end of 2024, down from 3 in March as inflation projections ticked mostly higher in 2024 and 2025. The longer-run Fed Funds rate projection also ticked slightly higher.
What this means for home buyers and sellers
For home shoppers and sellers, I expect that peak mortgage rates likely remain in the rear-view, but volatility remains a risk, complicating moving decisions for home sellers, homebuyers, and renters alike. While the median listing price on Realtor.com has risen 37.5% since May 2019, home prices on a per square foot basis are up 52.7%, or more than double the pace of overall inflation in that period. When combined with rising mortgage rates, affordability has been stretched and may be at a breaking point, especially for young households who do not own a home and cannot tap into the record-high level of home equity that existing homeowners can access. While the overall homeownership rate remains relatively high, the challenges of accessing the housing market which have caused lower sales to first-time homebuyers is putting downward pressure on the homeownership rate, especially for younger households, and renewing the importance of addressing these challenges during . One important way that the Fed can contribute is by bringing inflation back to the 2% target, putting the financial system back on the firm foundation that will support economic growth and lower interest rates, including for mortgages, in the long run.