Fed Holds on Rates: Now What?

David Deem

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Dave@DeemTeam.com

At the conclusion of its last meeting of the year, the Federal Reserve kept rates unchanged, in the 1.5 percent-1.75 percent range, and announced its economic projections, or “dot plot,” anticipating 1.9 percent growth in inflation in 2020. Based on its projections, the Fed is likely to keep rates unchanged, as well, in the upcoming year.

“The [Federal Open Market] Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective,” according to the policymaker’s statement.

“Everybody’s well aligned around this being the appropriate level of rates for now, and that the state of the economy does not warrant further action at this time,” explains Greg McBride, chief financial analyst at Bankrate, of the vote.

The Fed’s goal is keeping momentum up, as the current economic expansion, the longest on record, stretches to 10-and-a-half years. Its decision follows three rate reductions this year, designed to drive inflation near the policymaker’s 2 percent target. In determining policy, the Fed generally looks to the Personal Consumption Expenditures Price Index, an inflation measure, which has remained soft. Another gauge, the Consumer Price Index, jumped to 2.1 percent in November, while, at the same time, the economy generated 266,000 jobs and 3.5 percent unemployment, the Labor Department reported.

“The job market is going gangbusters,” Lawrence Yun, chief economist at the National Association of REALTORS®, said in a statement at the time, adding that, “therefore, the Federal Reserve is likely to stand on the sidelines, with neither rate cut nor hike, through the end of the 2020 political election year.”

“We expect [the Fed] will hold at this level of rates through the course of next year, with slower economic growth, a steady job market and modest inflation allowing them to take an extended pause,” said Mark Fratantoni, chief economist at the Mortgage Bankers Association, in a statement. “FOMC voters generally have similar expectations regarding the economic forecast, with many anticipating that rates will be on hold for an extended period.”

At NAR’s Real Estate Forecast Summit, held this week, 69 percent of economists expected the Fed to hold off on rate raises in 2020, while 31 percent expected the Fed to lower the rate.

If inflation rises, chances climb for mortgages rates—but, for 2020, the consensus is low, low, low. (More: 2020 Housing Market: What the Experts Think) Average mortgage rates remain steady, according to Freddie Mac’s latest report, with the adjustable mortgage rate recently shrinking to 3.39 percent.

“Steady short-term rates should keep longer-term rates, including mortgage rates, steady as well, which will be a positive for homebuyers in the year ahead,” Fratantoni, of MBA, said.

During last month’s REALTORS® Conference & Expo, Yun explained fixed mortgages move with Treasury yields, not Fed policy—a common misperception.

“Rates are more tied to communication, not policy,” said Yun. “In prior years, mortgage rates dropped just based on the Fed’s consideration of policy changes, not actual changes.”

The economists at NAR’s Real Estate Forecast Summit forecasted the 30-year fixed mortgage rate to stand at 3.8 percent in 2020, and 4 percent in 2021. In an annual forecast from realtor.com®, experts predicted rates rising to 3.85 percent in 2020, and finishing at 3.88 percent for the year, barring considerable global or political upheaval. Forty-four percent of Americans—the majority—believe mortgage rates will remain unchanged in the upcoming year, according to Fannie Mae’s latest reading.

“With the considerably less active Fed, mortgage rates will be more placid than we have seen in recent years,” McBride says. “The good news is they are likely to stay at very attractive levels for both homebuyers and refinancers, as uncertainty about trade, economic growth and the coming election remain in play.”

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