Fed holds rates steady
The Federal Reserve’s Open Market Committee (FOMC), the rate-setting body that meets roughly eight times per year, left the federal funds rate target unchanged at its March meeting at a range of 3.5% to 3.75%. Similar to recent meetings, Wednesday’s vote to set rates was not unanimous with Gov. Stephen Miran dissenting because he preferred a cut and three regional presidents dissenting because, although they supported leaving the rate unchanged, they did not support inclusion of an easing bias in the statement at this time.
What’s changed? Recent and expected macro shifts
Since the Fed’s last meeting, oil prices have ebbed modestly, but remain elevated as the Strait of Hormuz continues to remain largely closed. Meanwhile, 10-year Treasury yields are modestly higher, roughly 4.4%—notably higher than the 4% level they’d reached just before active conflict in Iran began. Mortgage rates remain near 6.25%—a quarter point above their pre-conflict level just below 6%—and are likely to tick higher.
The U.S. labor market surprised with some resilience in March as unemployment dipped and payroll jobs increased, following a mixed January (generally stronger) and February (weaker). Inflation data had been relatively steady in February, but picked up in March as a result of the oil price surge.
What hasn’t changed? The dual mandate
The committee must still balance its two goals—price stability and full employment—at a time when reasonable arguments could be made for a wide range of policy choices. Different perspectives on (1) what the outlook is and (2) how forward-looking to be only further widen the option set.
The degree of tension between the two goals at present has increased modestly as the conflict in Iran has pushed inflation higher. Tensions have also elevated uncertainty in the outlook and especially in the range of future inflation estimates. While this could be a short-lived supply shock that doesn’t kick off a wider bout of inflation, policymakers who lived through the 2021 experience of “transitory” inflation that has yet to fully fade are likely watchful.
In this environment, we expected further dissent, as we saw in the March and January meetings, and that expectation was spot-on.
What else hasn’t changed? An upcoming leadership transition
Chair Jerome Powell’s term as head of the Board of Governors expires on May 15, and President Donald Trump‘s nominee to replace him, Kevin Warsh, continues to work his way through the confirmation process. Warsh is expected to be confirmed and sworn in before the next FOMC meeting in mid-June, so this is Powell’s last meeting as FOMC chair. Powell announced his intention to remain on the Board of Governors to continue to serve at least part of the remainder of his term, which expires in 2028. This move is unusual but not unprecedented. The last chair to stay on in this capacity was Marriner Eccles, the namesake of the offices of the Reserve Board, whose chairmanship ended in 1948.
In a hearing on April 21, Warsh cited a need for “regime change” at the Fed. He focused on changing the way the Fed fights inflation with particular interest in shrinking the currently $6.7 trillion balance sheet to create an opportunity to lower the Fed policy rate without changing the posture of monetary policy. The key question for the housing market is how this would affect long-term interest rates, including the 10-year yield and mortgage rates.
Warsh’s testimony also included additional statements that could signal changes in the way that the Fed operates without losing sight of its dual mandate. For one, Warsh questioned whether forward guidance was helpful, suggesting that publishing forecasts as the Fed does in its summary of economic projections may cause the Fed to “hold on to those forecasts longer than they should.” Warsh also seemed to question the 2% inflation target—put in place formally in January 2012—that has become the key way the Fed implements its “price stability” mandate, noting that inflation data is imperfect.
What does this mean for housing, homebuyers, and sellers?
In the initial ceasefire period, interest rates and mortgage rates began to move lower, but as tensions ratchet up again, and the Strait of Hormuz appears to be closed for a longer period, interest rates have moved higher. Despite the key decisions and upcoming leadership transition for the Fed, geopolitics is likely to be the bigger driver of mortgage rates in the near term. For buyers and sellers hoping for favorable financing while making a move, a reduction in tension is likely to result in lower rates. Fortunately, even though rates are above their late-February low, they remain lower than they were at this time last year, and that’s helping power a seemingly typical uptick in housing activity as we move into the spring season. Furthermore, a balanced national reading on the Realtor.com® Market Clock is likely to help buyers and sellers meet in the middle as negotiation power is distributed more evenly between the two parties. It’s worth noting, however, that beneath the balanced national picture, data shows more fragmented local conditions, underscoring the need for buyers and sellers to have local data and perspective when approaching the market this spring.
