Amid a backdrop of a growing economy and softening inflation, the Federal Reserve Open Market Committee elected to keep rates steady. The decision was the second consecutive meeting where the Fed elected to pause on rate hikes, following 11 rate hikes since March 2022.
The decision to hold rates will maintain the federal funds rate between a target range of 5.25% and 5.5%.
“How I read this pause is that there isn’t clarity in the economy. The Fed has continually told us that they are data dependent,” says Zonda chief economist Ali Wolf. “If you look at the labor market and inflation, for example, both are showing signs of softening, but both are still above what would be deemed healthy and sustainable for the long term. The Fed wants to see what the upcoming data tells them about whether we continue to see a softening or if we are stuck in current trends. If we are stuck, then the Fed may feel the need to raise rates one more time.”
In a news release announcing the decision, the Federal Reserve Open Market Committee said “economic activity expanded at a strong pace in the third quarter.” The Fed said job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation is running at 3.7% on an annual basis, a significant improvement from the end of 2022. However, inflation still remains above the Fed’s target of a 2% annual rate.
“What is next for the Fed completely depends on how the data comes in. If inflation continues to trend down, then I think the Fed will feel their job is done and the current policy is at a level that they call ‘sufficiently restrictive,’” Wolf says. “Another key thing is to watch how the financial markets react. If bond yields continue to rise, they can essentially do the job for the Fed by slowing growth via higher market-driven rates.”
While watching to see what the Fed does at its next meetings will be important, Wolf says the building community should also closely track the 10-year Treasury yield.
“For example, the 10-year Treasury was already trending down ahead of the Fed announcement because of two weaker-than-expected economic releases in the morning,” Wolf says. “The bond market can tell us a more real-time picture about mortgage rates.”
