Federal Reserve Holds Rates Steady in September

One More Rate Hike Expected for 2023

Yesterday, the Federal Reserve concluded its two-day meeting and announced that the federal funds rate would remain at the current range of 5.25% - 5.5%, a 22-year high. The Fed also released updated economic projections, which show that the Fed anticipates one more rate hike later this year to raise the federal funds rate to 5.5% - 5.7% to bring inflation down to the 2% goal that the Fed has set as its goal.

Examining the Fed's Updated Economic Projections

Along with the anticipated decision to keep interest rates at their current levels, this meeting was highly anticipated due to the release of the economic projections from the Fed. These projections provide economists the opportunity to examine what the Fed thinks they need to do with the federal funds rate to decrease inflation, and how long rates will remain at elevated levels in the future.

As mentioned above, the Fed anticipates one more rate hike before the end of the year, with twelve members of the Federal Open Market Committee claiming that another interest rate hike is necessary, and seven other members feeling that the current interest rate levels will be sufficient for the remainder of the year to bring inflation down to the 2% goal of the Fed.

Additionally, the FOMC members believe that interest rates will fall by 0.5% next year, from their anticipated peak of 5.5% - 5.75%, which would mean that the Fed now believes that it needs to hold rates at a higher level for longer than they had initially forecasted in June. The previous estimate during their June meeting was a full percentage point drop in interest rates.

What Data Leads the Fed to Believe Another Rate Increase is Necessary?

When looking at data points to inform their decisions on interest rates and the continued battle against inflation, the Fed’s preferred inflation measure is the Personal Consumption Expenditures (PCE). In my previous blog, I briefly mentioned why the PCE is the preferred inflation measure for the Fed. PCE rose 4.2% year over year in July, which is up from 4.1% in June, but it is also down from the 4.5% - 4.6% range that we saw at the start of the year.

Another popular inflation measure is the Consumer Price Index, or CPI, which rose 0.6% in August, after increasing by 0.2% in July.

The Fed also measures general economic activity as a whole, noting in their press release that,

“Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.

The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”

How the Fed Interest Rate Decisions Impact the Housing Market

While the federal funds rate does not directly impact mortgage rates, it does directly impact banks nationwide, which subsequently impact the mortgage rates offered in the market.

Danielle Hale, chief economist for Realtor.com noted the pains that the increased interest rates could bring to the housing market when speaking to Yahoo Finance,

“... since the Fed’s September projections keep another rate hike on the table, mortgage rates are not likely to drift lower in the absence of new data warranting a reconsideration of the outlook … this means that affordability headwinds that buyers face are likely to continue.”

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