Fed Skips Rate Hike in December. Three Cuts Likely in 2024

No Fed hike in December

The Federal Reserve concluded its December meeting by skipping a rate hike for the third time in a row.

With the latest inflation data showing promise and economic activity slowing, the central bank voted to hold the federal funds rate steady, anticipated by many industry experts. With inflation heading closer to target, rate cuts appear to be on the menu in 2024.

“Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated,” according to the press release.

The Fed’s role and December’s FOMC meeting

The Fed doesn’t technically set mortgage interest rates. Multiple factors determine mortgage rate changes, but they do intrinsically correlate with the central bank’s policy actions.

At its December meeting, the Federal Open Market Committee (FOMC) held the federal funds target range static for the third consecutive time. While this continued hike pause was mostly expected, the fight against inflation isn’t over.

The national inflation rate has been on a gradual downtrend for the past 17 months — going from June 2022’s 41-year high of 9.1% to 3.1% in November, according to the U.S. Bureau of Labor Statistics. The FOMC’s objective is to bring inflation to around 2% over the long term.

The FOMC’s projection materials show a median federal funds rate of 4.6% in 2024, down from the 5.25%-to-5.5% range it currently sits. Lowering it to the projection would require cuts — likely three of 25 basis points (0.25%) each.

“Additional rate hikes no longer appear to be part of the conversation. It is all about the pace of cuts from here,” said Mortgage Bankers Association Chief Economist Mike Fratantoni. “This is good news for the housing and mortgage markets. We expect that this path for monetary policy should support further declines in mortgage rates, just in time for the spring housing market.”

The FOMC will base its next moves on how their latest pause plays out and the overall economic outlook. The committee’s next meeting comes on Jan. 30-31, 2024 and will adjust its future policy actions as necessary.

How will mortgage rates react?

Interest rates trended upward throughout 2023, reaching a 23-year high in October. The FOMC’s actions have generated mixed results in their immediate aftermath.

Most recently, the average 30-year fixed-rate mortgage (FRM) rose one basis point (0.01%) the day following September’s hike pause and declined three basis points (0.03%) after November’s pause, according to Freddie Mac. From Nov. 2 to Dec. 7, the average 30-year FRM dropped 73 basis points (0.73%) from 7.76% to 7.03%.

Interest rates typically rise alongside increases to the fed funds rate and run off of balance sheet holdings. In its statement, the FOMC described the U.S. banking system as “sound and resilient” and job gains remain strong but have moderated.

The FOMC’s pause in hiking strategy coupled with those economic indicators signal they believe inflation and interest rates should start to gradually dissipate.

“The Federal Reserve’s decision today marks two important milestones,” said CoreLogic Chief Economist Selma Hepp. “The first is that the Fed confirms that it believes its actions helped tame inflation while also preventing the economy from slipping into recession. The second is that housing can begin the slow process of returning to a more normalized rate environment. However, we expect it will be several months before housing returns to smoother sailing and there may yet be some choppy waters ahead.”

Should you lock in a mortgage rate?

Mortgage rates are volatile by nature and multiple factors impact where they’ll go.

While there are no guarantees, the FOMC’s latest action indicates an a downward trajectory for interest rates. And although the average 30-year FRM stands near 20-year highs, you can always negotiate your rate down, get creative in cutting costs, and refinance when rates eventually hit a downcycle. Plus, a major benefit of homeownership is building equity.

If you’re ready to buy a home, reach out to a local mortgage professional to see the rates and loan types you qualify for.