Fed Holds the Line, Leaving Rates Unchanged in Ongoing Inflation Fight

The Federal Open Market Committee (FOMC) maintained the target range for the federal funds rate on Wednesday following hotter-than-expected inflation and employment cost data.

In its familiar refrain, the central bank left the federal funds target range untouched at 5.25% to 5.5% after its monthly meetings on Tuesday and Wednesday. Most investors and analysts expected the central bank to hold their “higher for longer” stance, so the decision came as little surprise.

The federal Employment Cost Index (ECI) came in hotter than anticipated, increasing 1.2% in the first quarter of 2024 on a seasonally adjusted basis, according to Bureau of Labor Statistics data released Tuesday. That’s notably faster growth than the 0.9% increase seen at the end of the previous quarter.

On an annual basis, benefits and wages for the first quarter jumped 4.2% in March compared to an increase of 4.8% a year ago, the BLS reported.

While strong wage gains may seem like good news, especially for employees, a sudden surge in employment costs could spell trouble for inflationary pressures, and that tends to make the Fed anxious.

Investors took note, too. Stocks traded briskly after Tuesday’s data came out, and the benchmark 10-year Treasury yield surged 5 basis points Tuesday to 4.67%, pushing mortgage rates further into the 7%

It’s yet another red flag in the battle against persistent inflation, which many investors take as a sign that the central bank isn’t keen to cut rates until much later in the year versus earlier as many had anticipated—and many in the mortgage industry had hoped.

In a post-meeting statement, the Fed affirmed plans to reduce its holdings of Treasury securities, agency debt and agency mortgage-backed securities.

“Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion,” the statement reads.

“The Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities.”

Ahead of the Fed’s announcement, economists were expecting much of the same, and their hunch was right.

Danielle Hale, chief economist with Realtor.com, said in a statement that the Fed’s stance has been consistent on wanting to see more sustained progress on bringing down inflation to its 2% goal before considering any rate cuts.

“My expectation is that it will take longer, and that sets the Fed up for a late summer or early fall adjustment, and mortgage rates could follow suit,” Hale said.

However, she acknowledged the economy is still showing resilience and performing well amid inflationary pressures.

“The economy has maintained surprising momentum in light of the tightening and current level of short-term rates,” Hale said. “The unemployment rate remains below 4%, companies are adding workers at a brisk clip, and workers are seeing real wage growth as inflation eases.”

Still, Hale acknowledged that recent upticks in inflation cannot be ignored, driven notably by skyrocketing shelter and energy costs. Additionally, mortgage rates remain elevated, with the Freddie Mac 30-year fixed mortgage rate rising from 6.74% just before the March Fed meeting to 7.17% heading into the May meeting.

For homebuyers and sellers, this means affordability challenges will drag on. And for many homebuyers facing a shortage of affordable homes on the market thanks to persistently low inventory, they’re increasingly looking at the Midwest and South in an elusive search for options within their budgets, according to Realtor.com data.

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