Fed stays put but is prepared to hike rates one more time
Fed stays put but is prepared to hike rates one more time

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Federal Reserve policymakers voted Wednesday to keep short-term interest rates where they’ve been since July, but signaled that they expect to implement one more rate hike before the end of the year and keep rates higher for longer in 2024.

The Federal Open Market Committee voted unanimously to keep its target for the short-term federal funds rate at 5.25 to 5.5 percent, as expected. But the latest “dot plot” mapping individual committee member’s future expectations showed most think the Fed will need to bump rates up one more time in order to get inflation under control.

Briefing reporters after the vote, Federal Reserve Chair Jerome Powell prefaced his comments about the potential for further rate hikes as he often does, by emphasizing that decisions will depend on “incoming data and their implications for the outlook for economic activity and inflation.”

“Given how far we have come, we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks,” Powell said of recent economic cooling. “But we are mindful of the inherent uncertainties in precisely gauging the stance of policy. We’re prepared to raise rates further if appropriate, and we intend to hold policy at a restrictive level until we’re confident that inflation is moving down sustainably toward our objective” of 2 percent.

Hiking rates to fight inflation

The Fed’s last rate hike in July brought the short-term federal funds rate to the highest level since 2001. But while the Fed was hiking rates by as much as 75-basis points at a time in 2022, this year it’s approved four smaller, 25-basis point increases — in February, March, May and July.

The latest dot plot, included in the Summary of Economic Projections released Wednesday, shows 12 out of 19 Fed policymakers envision one more 25-basis point increase in the federal funds rate by the end of the year. The Fed has two more meetings this year, meaning another rate hike could be coming Nov. 1 or Dec. 13.

But Powell stressed that the Summary of Economic Projections (SEP) “is not a plan that is negotiated, or discussed really as a plan,” but “an accumulation of individual forecasts from 19 people, and what you’re seeing is the median.”

“If you looked at the SEP … you’ll see that a majority of participants believe that it is more likely than not that it will be appropriate for us to raise rates one more time in the two remaining meetings this year,” Powell said. “Others believe that we have already reached [the appropriate level for rates], so it’s something where we’re not making a decision … just [maintaining] the rate and [awaiting further] data.”

While the dot plot is not a plan, it does reflect “that economic activity has been stronger than we expected, stronger than I think everyone expected,” he said.

While the Fed has direct control over short-term interest rates, long-term rates for mortgages and government debt are determined largely by market forces. In an implementation note, the Fed said it will continue “quantitative tightening” that began last summer, letting $35 billion in mortgage-backed securities and $60 billion in Treasurys roll off its balance sheet each month.

Yields on 10-year Treasurys, which often predict where mortgage rates are headed next, barely budged Wednesday, as bond market investors look ahead to next year when the Fed is expected to start bringing short-term rates back down.

The latest dot plot shows Fed policymakers envision bringing short-term rates down by half a percentage point next year, compared to guidance issued in June for a full percentage point reduction in 2024.

Ian Shepherdson

“This is a hawkish hold, signaling higher-for-longer, but the Fed’s intentions today are not a set of promises,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients. “They will react to the data, and our take on the data is that core inflation will fall faster than they expect, and the labor market will loosen more than they expect.”

Pantheon Macroeconomics is forecasting that the Fed will bring short-term rates down by 150 basis points next year, or 1.5 percentage points — three times as big a drop as indicated by the dot plot.

Pantheon forecasters have noted three potential wildcards for the economy: The United Auto Workers strike targeting the big three U.S. automakers, the resumption of federal student loan payments in October, and the growing likelihood of a government shutdown.

Futures markets predict lower rates next year

Target rate probabilities for Dec. 18, 2024, Federal Reserve meeting. Source: CME FedWatch Tool.

Futures markets tracked by the CME FedWatch Tool predict a 79 percent chance that the Fed will have lowered rates by the end of next year, but only a 53 percent probability that rates will come down by more than half a percentage point by December.

In forecasts issued this week, economists at Fannie Mae and the Mortgage Bankers Association agreed that mortgage rates are likely to come down next year, but they differed on how much.

Mortgage rates projected to ease next year

In a forecast released Monday, forecasters at Fannie Mae said they see rates on 30-year fixed-rate loans easing to 6.3 percent by the fourth quarter of 2024. MBA economists predict rates will fall more sharply and average 5.4 percent by the end of next year.

“We expect that inflation will continue to drop closer to the Fed’s target, the job market will continue to slow, and that mortgage rates should begin to reflect that the Fed’s moves in 2024 will be cuts — not further increases,” MBA Chief Economist Mike Fratantoni said after Wednesday’s Fed vote. “This should provide some relief in terms of better affordability for potential homebuyers.”

Fratantoni said housing inventory shortages continue to be the biggest challenge for many potential buyers.

Mike Fratantoni

“While homebuilder sentiment is clearly impacted by the recent surge in mortgage rates, permits for single-family homes provide a positive outlook for the pace of construction in the year ahead,” Fratantoni said. “If mortgage rates trend down in 2024 as we anticipate, the combination of more homes for sale and somewhat lower rates should support stronger purchase volume.”

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