The Fed increased projections for 2024 and 2025 rates at its September meeting, though it kept rates unchanged for now. That will likely keep mortgage rates higher for longer.
The Federal Reserve held interest rates steady at its September meeting, as expected, and acknowledged that the U.S. job market is slowing down. But the Fed also signaled that it expects to keep interest rates higher for longer than anticipated, which is likely to impact the U.S. housing market. The reason is not because of higher-than-expected inflation, but rather that the Fed is expecting the economy to grow faster and unemployment to remain lower than it previously did. This increases the level of interest rates the economy can sustain before those rates start to weaken the economy.
How the Fed changed its stance on interest rates for the next two years: They raised interest-rate expectations for 2024 and 2025 by half a percentage point each, a major change in their projection. As such, they expect to cut rates twice next year instead of four times as they previously forecasted. That’s because they think the neutral rate–the level of interest rates that neither stimulates nor contracts economic growth, known to economists as r star–may be higher post-pandemic. This signals to the Fed that they should keep rates higher to achieve their policy goals, whether that is to decrease economic growth to bring down inflation or let the economy hum along once they have achieved their inflation goals.
How it could impact the housing market: Higher-than-anticipated interest rates in 2024 and 2025 will keep borrowing costs elevated. That could keep mortgage rates and housing costs higher for longer. High interest rates also keep the cost of credit card and car-loan debt high, which could cut into potential homebuyers’ budgets.
What about the rest of 2023? The Fed is projecting one more rate hike this year to keep their options open. They may not hike rates again before the end of the year, but it’s better for market stability to surprise investors by not hiking than by making an unexpected hike. It’s not clear yet whether another hike in 2023 is necessary, but upcoming key economic reports on inflation and the labor market will help decide. Financial markets currently didn’t anticipate another rate hike in 2023 before the Fed’s September meeting, so such a move would probably affect mortgage rates. However, given how far the Fed has already gone, another 25 bps hike is unlikely to impact the economy or the housing market much. What matters more is how long we stay at the current level of interest rates and how quickly the cuts come once they start.
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