Federal Reserve Update

May 2024 Update: Holding Course Means No Improvement For Home Buyers

The fight against inflation is currently at an impasse, which is not the news the mortgage market wanted to hear, but you can calculate your mortgage impact to be better prepared. The Federal Reserve opted to maintain its current fiscal policy, with basis rates around 5.25-5.5%. That decision will keep the 10-Treasury Yield higher and, by extension, interest rates on all products including mortgage rates. 

The Fed basis rate has been the same since July 2023. It’s hovering near a 23-year high, making the cost of borrowing money higher for consumers across the board. 

In his opening statement, Federal Reserve Chairman Jerome Powell said, “Inflation is still too high, further progress in bringing it down is not assured, and the path forward is uncertain.”

The day after the Federal Reserve update was made, mortgage rates crept upward for all loan products. A 30-year fixed-rate mortgage was at 7.37% on May 2, 2024, up 0.07% from the prior week and 0.01% from the day before.

Behind the Fed Decision

The Federal Reserve aims to maintain 2% inflation, but rates have stubbornly increased through the first four months of 2024. The FOMC noted in its statement that the nation’s “economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.”

The Fed tracks inflation using the Personal Consumption Expenditures Price (PCE) Index, which measures price changes in the goods and services US consumers buy. In March 2024, the index increased by 2.7% over the prior month. Using the Consumer Price Index (CPI), nationwide inflation was at 3.5% for the same month. The next CPI data will be released on May 15, 2024.

Meanwhile, the labor market and wages are growing. The low unemployment rate and job gains encourage the Fed. That, and a few other factors, led the Federal Open Market Committee to hold its position on current basis rates. 

Future of Interest Rates

“It is likely to take longer for us to gain confidence that we are on a sustainable path down to 2% inflation,” Fed Chair Jerome Powell said after the FOMC meeting. He went on to hint that the institution is doubting its basis rates will come down in 2024. It would take a significant labor market weakening or a swifter drop in the inflation rate.

In the months ahead, that means the basis rate is unlikely to change. Earlier this year, economists had expected a rate drop by July. Updated forecasts now say the Fed may not change its rate at all in 2024. 

One Small Change Brings Some Hope

But savvy investors noticed one small change that could potentially bring some relief for those turned off by the persistently high mortgage rates. The Fed announced its plan to slow down its “quantitative tightening (QT) program.” 

These are the Treasury Bond holdings bought to drive down long-term interest rates during the pandemic-induced economic slowdown from 2020 to 2022. It effectively reduces the amount of money available in the US banking system. Less money to lend means lenders charge more to borrow what they have.

Since June 2023, the Fed has allowed these assets to mature and roll off its books without being replaced. This has decreased the money supply and contributed to higher interest rates. Now, it will scale back its QT program to over half its current rate, or $25 billion.  

US Treasury yields immediately dipped on the news, including the 10-year Treasury Yield that impacts mortgage rates. One analysis suggests the QT program added 1.5% points to mortgage rates, or about $300 extra a month on the average mortgage debt. 

The next FOMC meeting will be June 11-12. This meeting will include a Summary of Economic Projections, which will be the committee’s opinion of the most likely outcomes for various measures, including inflation over the coming two years. It should give some indication of what we could expect for the second half of 2024.