It’s been a long time coming, but folks—and the economy—can take a cautious sigh of relief as the Federal Reserve has snapped the interest-rate hiking streak it’s been on for more than a year.
In arguably the most anticipated announcement since embarking on their 14-month campaign, Fed officials announced Wednesday that they would take a break from raising rates, leaving the federal funds rate between 5% and 5.25%.
The move comes on the heels of 10 consecutive increases as the Fed has tried to tame inflation, which has continued to cool in recent months. The latest Consumer Price Index (CPI) released Tuesday morning showed that inflation hit its lowest levels in over two years at 4%.
“Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” Fed officials said in a post-meeting statement.
Foregoing another rate hike allows the U.S. economy to take a breather following recent banking turmoil and concerns that inflation wasn’t slowing appropriately.
While Wednesday’s decision was anticipated—and applauded—by pundits, the Fed hasn’t shut the door on future rate hikes in coming months. Officials signaled that additional increases—two more based on projections—could be on the horizon.
“In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the Fed said.
The next Fed meeting is set for July 25 – 26, giving officials time to evaluate the impact of its last 10 rate hikes while assessing how to move forward for the rest of the year.
Fed Chair Jerome Powell echoed similar sentiments in a press conference following the meeting.
“We have been seeing the effects of our policy tightening on demand in the most interest rate sensitive sectors in the economy, especially housing and investment,” he said. “It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.”
Powell acknowledged that the headwinds from tighter credit conditions for households and businesses would likely weigh on economic activity, hiring and inflation, but claimed the extent of the impact is still uncertain.
While still well above the 2% benchmark that Fed officials aim for, pundits and onlookers from the real estate sector suggest that it provides convincing proof that things are moving in the right direction for the economy.
“The Fed has been trying to find a narrow path by which to bring inflation down without sending the economy into recession,” said Dr. Lisa Sturtevant, Bright MLS chief economist, in a statement. “After 10 straight interest rate increases, the central bank has pressed pause, indicating a willingness to see if they have done enough to tackle inflation.”
While the consumer price index has been moderating in recent months, Sturtevant noted that the stubborn inflation had raised the question of whether the 2% target is an appropriate benchmark.
“It is extremely unlikely that the Fed will back down from that goal since they have been out so forcefully and consistently with the intent to reach that milestone,” she said. “As a result, we’re probably going to see the Fed resume rate increases at its next meeting, which could raise the probability that the economy will head into a mild recession, if not later this year, then by the beginning of next year.”
Mike Fratantoni, SVP and chief economist for the Mortgage Bankers Association (MBA), echoed similar sentiments while also acknowledging the current impacts of the Fed’s past monetary policy on the housing market and mortgage rates.
“Given the banking challenges that have already resulted in a tight credit environment, the threat of further hikes, baked into medium-term rates today, will only further slow economic activity,” he said. “Mortgage rates have generally increased in the past month, and this has slowed the pace of housing market activity, as potential homebuyers have been very sensitive to any changes in rates this year.”
The MBA expects mortgage rates to drift down over the year’s second half as the economy slows and the Fed reacts accordingly by holding off on further rate hikes.
Dr. Lawrence Yun, chief economist for the National Association of REALTORS® (NAR), noted that there is a lag time between decision and inflation regarding monetary policy.
“The rate hikes from earlier months have yet to exert their force at a time when inflation has already decelerated to 4%,” he said in a statement.
Yun was among experts that questioned the Fed officials’ decision to raise rates in May, while other onlookers in the real estate sector lobbied for the Federal Reserve to pause its rate increase efforts this month.
“There is no need to consider raising interest rates,” Yun said. “In fact, considering the balance sheet difficulties faced by community banks and weakness in the commercial real estate sector, the Fed should look at cutting interest rates before the end of the year. The Fed should look forward, not backward.”
