The Fed Pause Continues

2025-06-18T15:17:06-05:00

Reflecting most forecasters’ expectations for the June FOMC meeting, the Federal Reserve continued its post-2024 pause for federal funds rate cuts, retaining a target rate of 4.5% to 4.25%. The pause comes after a 100 basis point series of reductions in late 2024. Despite these cuts, mortgage rates have remained in the high 6% range. The Fed also held unchanged its ongoing quantitative tightening program, which is more strongly focused on balance sheet reduction for mortgage-backed securities (MBS). The Fed reaffirmed its policy commitment to achieve maximum employment and reduce inflation to a two percent target rate. During the 2025 policy pause, the Fed remains data dependent in a “wait and see” mode for developments in areas like tariff policy. Chair Powell noted that we learn more about tariffs later this summer. NAHB’s forecast incorporates two rate cuts from the Fed for 2025, one in the third quarter and one in the fourth quarter. The Fed noted that economic activity continues at a “solid pace,” however swings in imports affected the first quarter GDP data. The central bank also stated that the unemployment rate remains low and inflation remains “somewhat elevated.” I would note that the primary driver of this elevated inflation is ongoing high rates of shelter inflation, which reflect significant, underlying increases for residential construction costs for the post-covid period. During his press conference, Chair Powell cited that the housing market suffers from both long-run and short-run issues, involving affordability and a [structural] housing shortage. In prior comments to Congress, Powell has noted that home builders face a perfect storm of challenges from both the demand- and supply-sides of the market. The Federal Reserve also published an update for its Summary of Economic Projections (SEP). Compared to its prior March projections, the Fed reduced its 2025 GDP forecast from 1.7% to 1.4% (year-over-year rate from the fourth quarter). During his press conference, Chair Powell linked policy uncertainty as a complicating factor for economic growth. Additionally in the SEP, the Fed slightly increased its 2025 forecast for the unemployment rate in the fourth quarter from 4.4% to 4.5%. The central bank also increased its core PCE inflation projection for the final quarter of the year from 2.8% to 3.1%. During his press conference, Chair Powell noted that economic forecasters cited tariff policy as a contributing factor for a higher than expected level of inflation for 2025. He specifically projected that a measurable amount of inflation will arrive to the economy this summer. There is some debate among economists whether tariffs would have just a one-time impact on the aggregate price level, which would not be inflation pressure felt over a sustained period of time, or would in fact be a factor increasing inflation as a series of price increases. Looking forward to future monetary policy, the “dot plot” projections of the SEP leave the Fed forecasting two rate cuts in 2025, followed by just one reduction in 2026 and one more cut in 2027. This projection removes one rate cute from both 2026 and 2027 compared to the March dot plot, although the Fed continues to point to 3% as the long-run, terminal rate for the federal funds rate. Discover more from Eye On Housing Subscribe to get the latest posts sent to your email.

The Fed Pause Continues2025-06-18T15:17:06-05:00

Fed Remains on Pause with Rising Uncertainty

2025-05-07T14:23:12-05:00

The Federal Reserve remained on pause with respect to rate cuts at the conclusion of its May meeting, maintaining the federal funds rate in the 4.25% to 4.5% range. Characterizing current market conditions, the central bank noted that the “unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid.” However, the Fed noted that “inflation remains somewhat elevated.” Today’s statement acknowledged the weak first quarter GDP report via a reference to “swings in net exports have affected data” but otherwise the economy continues to expand at a “solid pace.” The Fed also reiterated its commitment to maintain maximum employment and bring inflation back to its 2% target rate. With respect to monetary policy, the Fed noted that uncertainty for the U.S. economy has increased. Mindful of its dual mandate (price stability and maximum employment), the Fed noted that the “risks of higher unemployment and higher inflation have risen.” This statement reflects the complex situation the Fed currently faces, with risks to both sides of its policy mandate increasing. While todays statement does not explicitly reference tariff policy, the debate over tariffs is an obvious candidate for the source of these rising risks that would harm the labor market and raise prices. Indeed, Chair Powell referenced industry reports of tariff risks in his press conference. Many economists, who as a profession dislike tariffs, would argue that the Fed would likely move further on normalizing monetary policy and reducing rates, if not for the risks of future tariff policy. In the meantime, as Chair Powell noted, otherwise solid economic conditions leave the Fed with moderately restrictive policy and “in a good place to wait and see” with respect to future policy. Today’s statement noted that the Federal Open Market Committee “will carefully assess incoming data, the evolving outlook, and the balance of risks.” In particular, the Fed will review “readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.” While the list of data sources the Fed is watching seems like everything but the kitchen sink, the Fed should be sure to watch sinks, windows, lighting fixtures, and other building material pricing and availability to gauge future economic and inflation conditions. Shelter inflation remains a leading source of ongoing elevated inflation. And shelter inflation can only be reduced by building more attainable housing. Discover more from Eye On Housing Subscribe to get the latest posts sent to your email.

Fed Remains on Pause with Rising Uncertainty2025-05-07T14:23:12-05:00

Fed Remains in Wait and See Mode

2025-03-19T16:19:26-05:00

In a widely anticipated move, the Federal Reserve remained on pause with respect to rate cuts at the conclusion of its March meeting, maintaining the federal funds rate in the 4.25% to 4.5% range. While the central bank acknowledged that the economy remains solid, it emphasized a data- and policy-dependent approach to future monetary policy decisions due to increased uncertainty. According to Chair Powell, the Fed “is not in any hurry” to enact policy change and is well positioned to wait to make future interest rate moves. However, in a small dovish step, the Fed slowed the pace of its balance sheet reduction, but only for Treasuries. The Treasury security runoff will be reduced from $25 billion a month to $5 billion. The mortgage-backed security run-off process will remain at a $35 billion a monthly rate. Chair Powell stated that the change was not a signal of broader economic issues and was just a technical adjustment to the long-run goal of balance sheet reduction. Although the Fed did not directly address ongoing trade policy debates (and particularly trade and tariff details expected on April 2) and their economic implications, it reaffirmed that future monetary policy assessments would consider “a wide range of information, including readings on labor market conditions, inflation pressures, and inflation expectations, and financial and international developments.” With respect to prices, the Fed’s March statement noted that “inflation remains somewhat elevated.” For example, the CPI is at a 2.8% year-over-year growth rate. Shelter inflation, while improving as noted by Chair Powell, continues to run at an elevated 4.2% annual growth rate, significantly above the CPI. These costs are driven by challenges such as financing costs, regulatory burdens, rising insurance costs, and the structural housing deficit. The March Fed statement highlighted the central bank’s dual mandate, noting its ongoing assessment of the “balance of risks.”  Crucially, the Fed reiterated its “strong commitment to support maximum employment and returning inflation to its 2 percent objective.” The Fed also published its updated Summary of Economic Projections (SEP). The central bank reduced its GDP outlook for 2025 from 2.1% growth to just 1.7% (measured as percentage change from the fourth quarter of the prior year to the fourth quarter of the year indicated). Policy uncertainly likely played a role for this adjustment. The Fed made only marginal changes to its forecast for unemployment, pointing to a 4.3% jobless rate for the fourth quarter of 2025. The Fed did lift its inflation outlook, increasing its forecast for Core PCE inflation from 2.5% for the year to 2.8%. Forecasters, including NAHB, have lifted inflation estimates for 2025 due to tariffs, although tariffs may only produce a one-off shift in the price level rather than a permanent increase for the inflation rate. Nonetheless, Chair Powell noted that tariffs have already affected inflation forecasts for 2025. The Fed’s SEP also indicated that the Fed may cut twice this year, placing the federal funds rate below 4% during the fourth quarter of 2025. However, those FOMC members who saw less than two rate cuts this year were more likely to forecast no rate cuts at all for 2025. Looking over the long run, the SEP projections suggest that the terminal rate for the federal funds rate will be 3%, implying six total twenty-five basis point cuts in the future as rates normalize. This is lower than our forecast, which suggests a higher long-run inflation risk path and a terminal rate near 3.5%. A lower federal funds rate means lower AD&C loan rates for builders, which can help with housing supply and hold back shelter inflation. Discover more from Eye On Housing Subscribe to get the latest posts sent to your email.

Fed Remains in Wait and See Mode2025-03-19T16:19:26-05:00

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