Market Update: Rates Remain Relatively Unchanged, as Does the Federal Funds Rate; What’s Next for the Fed and Mortgage Rates?

Blog posted On June 19, 2023

As expected, the Federal Open Market Committee (FOMC) voted to leave the benchmark interest rate unchanged last week. Because the markets had already prepared for this decision, there wasn’t much resulting bond or rate movement. However, the decision was a notable change after 10 consecutive rate hikes starting in early 2022. The Fed’s statement and Fed Chair Jerome Powell offered slightly more insight on where they see rates going for the rest of the year.

Federal Reserve Chairman Jerome Powell made it clear that there was no reason to call this decision a ‘skip’ as the Committee has not made a decision about future meetings yet. A ‘skip’ would infer that there will be more rate hikes to come. A ‘pause’ indicates that there will likely be cuts to come. When asked about the Fed’s reasoning for the lack of hike, Powell responded: “It's reasonable, it's common sense to go a little slower. It seemed, to us, to make obvious sense to moderate our rate hikes as we got closer to our destination.”

Powell reinforced that the future of the Fed Funds Rate will depend on the economy, inflation, and economic data. Futures markets predict a 70% chance that the Fed hikes the benchmark rate at its July meeting. Half of the Committee expects to increase the benchmark rate by another half-point by December. As of now, there are no rate cuts on the horizon for 2023. "Not a single person on the Committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate if you think about it,” Powell said. “Inflation has not really moved down—it has not so far reacted much to our existing rate hikes.”

The rate announcement came one day after the latest consumer price index (CPI) gave us data on inflation in May. According to the index, inflation was slightly below expectations in May, rising just 0.1% month-over-month vs 0.2% expected. Annual inflation fell short as well. However, it’s core inflation that has the Fed’s eye. Core inflation, which strips food and energy costs, was right on the dot in May. Though the Fed pays more attention to the core personal consumption expenditures (PCE) index, the core CPI still offers valuable insight.

This week, the existing home sales report for May is scheduled for release. Recently, the market has been strapped for existing home inventory as many homeowners are reluctant to give up their pandemic-level interest rate in order to move. Consequently, sales have been slightly lower in recent months.

If you’re on the fence between sticking with your current rate or selling, let us know. Right now, home equity and home prices are still high, making a great opportunity to sell or downsize.

Sources: Barron’s, Bloomberg, Mortgage News Daily