The FOMC also said it would continue to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities.

During a press conference with reporters on Wednesday, Fed Chair Jerome Powell said that the committee decided to leave their policy interest rate unchanged. However, looking ahead, he did not exclude the possibility of another hike.

In spite of a higher-than-expected CPI reading in August, core inflation readings have been falling every month in 2023. Meanwhile, the pace at which new jobs were added to the economy slowed. Other labor market indicators, such as job openings and the unemployment rate, also point to a cooling economy, Danielle Hale, chief economist at Realtor.com noted.

Today’s decision not to raise rates will likely influence credit markets.

“In the mortgage market, for instance, consumers who have been holding off may begin to be motivated by the announcement to consider making the home purchase they have been waiting on,” Michele Raneri, vice president and head of U.S. research and consulting at TransUnion, said. 

In fact, mortgage applications picked up in the week leading up to the Fed meeting, signaling a wave of optimism. 

The CME FedWatch Tool showed a 99% chance the Fed would halt its hikes to the 5.25 to 5.5% range on Wednesday morning, according to interest rate traders. However, only 70.9% of these investors bet officials will freeze the rate hike at the November 1st meeting. 

On Monday, mortgage rates for 30-year fixed-rate mortgages were at 7.21%, according to HousingWire‘s Mortgage Rates Center. However, at Mortgage News Daily, mortgage rates were higher on Tuesday, at 7.30%.

The effects of tighter policy have already reverberated across the economy. While mortgage rates have steadied just below recent highs, they remain more than 3 percentage points above their pandemic-era lows. In the housing sector, the combined impact of higher rates and higher home prices drove the cost of financing a home up more than $400, or 22.5%, from a year ago.

Overall, the market has been rather optimistic about the rate picture this year. However, a number of experts are concerned that lifting rates too high could send the economy into recession.

Inflation picked up to 3.7% in August, down significantly from where it was a year ago but still higher than the 2% threshold. Core inflation—which excludes food and energy costs—rose 4.3% in August. Raising interest rates is designed to tackle those still-high prices outside of the volatile food and energy sectors.

If shelter was excluded from the CPI calculation, inflation would be about 1% in August, said Bright MLS Chief Economist Lisa Sturtevant last week. In August, the rent index was up 7.2%, rising for the 40th consecutive month. Meanwhile, rent growth slowed considerably and median rents nationally fell year-over-year in August, according to Sturtevant. Additionally, apartment construction is strong, which puts an additional pressure on landlords to avoid vacancy. In the second quarter of 2023, the national vacancy rate was 6.3%, up from 5.6% a year earlier. However, it takes months for those aggregate rent trends to show up in the CPI measures.

What’s next?

Although the Fed decided to hold steady this time, it remains fixated on taming inflation and bringing it back to the 2% target. In light of this goal, Realtor.com’s Hale expects the Fed to keep the option for an additional future rate hike on the table. 

During the press conference, Powell remained  extremely cautious, insisting on the Fed’s data dependent approach. He reiterated that the decisions that will be made at the two remaining meetings in 2023 will depend on the totality of all the data gathered, including the inflation data, the labor market data, the growth data, the balance of risks, etc. As is custom now, he sidestepped questions from reporters about what would prompt the FOMC to raise rates again before the end of 2023 or hold them steady.

Powell also shared the committee’s economic projections, showing a longer period of elevated rates.

“FOMC participants expect the rebalancing in the labor market to continue, easing upward pressure on inflation,” Powell said. “The median unemployment rate projection in the summary economic projections rises from 3.8% at the end of this year to 4.1% over the next two years.”

Meanwhile, the median projection for total PCE inflation is 3.3% this year, 2.5% next year and to reach 2% in 2026, he added.

Even though inflation remains well above the Fed’s longrunning goal of 2%, he acknowledged that inflation has moderated since the middle of last year.

On the housing market, he noted that activity “picked up somewhat” although it remains well below the levels of a year ago, largely reflecting higher mortgage rates. 

Indeed, Sturtevant highlighted the resilience of the housing market in the face of rising interest rates. “Over the past year, buyer interest has remained high, home prices continued to rise in most markets, and homebuilding activity has surged,” she said.

However, she underlined that, even with today’s pause, the aggressive rate hikes have had major and somewhat deferred impacts on the housing market. 

As demand might decline in the fall, Sturtevant expects home prices to fall in some markets. However, price declines will remain modest as supply will remain low, she added. 

“The biggest downfall of the market cooling is that many individuals and families–particularly first-time homebuyers–have been priced out of the market as a result of the Fed’s aggressive rate increase,” she said.

This afternoon’s projections give valuable insight into the amount of improvement in inflation that the Fed would want to see before pausing or ending the current tightening. 

“The Federal Reserve is rightly on pause and is looking for more data before determining its next course on interest rates,” NAR Chief Economist Lawrence Yun said. “With fewer job openings, slowing job gains, and softening core consumer price inflation, the Fed must consider the potential economic damage arising from any future rate hikes.”