Fed Skips Rate Hike in January. Are Cuts on the Way in 2024?

No Fed hike in January

The Federal Reserve wrapped up its January meeting by keeping the status quo.

For the fourth consecutive time, the central bank voted to skip a rate hike. Those hoping for a rate cut — as hinted at in the December meeting — will have to be patient a little longer. While inflation continues to show moderation, it’s still above the Fed’s long-term target. Going forward, it will adjust its policies based on economic data, outlooks, and risks.

“The Fed’s announcement to hold steady on rates was generally expected as the committee buys time to evaluate if inflation is, in fact, on a sustainable path back to the 2% target,” said Selma Hepp, chief economist at CoreLogic.

The Fed’s role and January’s FOMC meeting

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

At its January meeting, the Federal Open Market Committee (FOMC) held the federal funds target range static for the fourth time in a row. Although inflation is on an overall downtrend, it continues to fluctuate and remains above the Committee’s goal of 2%.

The U.S. annualized inflation rate hit a 41-year high of 9.1% in June 2022 and most recently reached 3.4% in December 2023, according to the U.S. Bureau of Labor Statistics. In its press release, the FOMC stated that it doesn’t expect rate cuts until there’s more confidence in sustainable disinflation. However, a rate reduction could be on the horizon.

“Inflation is dropping faster than many had anticipated, and the job market thus far is holding up quite well,” said Mike Fratantoni, Mortgage Bankers Association’s chief economist. “This combination should mean its next move will be a cut in order to prevent the real fed funds rate from becoming overly restrictive, thereby increasing the risk of a sharper economic slowdown. We continue to expect a first cut at the May meeting, with three cuts in total this year.”

The FOMC will also continue to shed its Treasury securities, mortgage-backed securities and agency debt. Of course, the Committee will adjust its monetary policy actions as appropriate. The next FOMC meeting will take place on March 19-20, 2024.

How will mortgage rates react?

Borrowers wrestled with interest rates reaching in 2023, watching as it climbed to a 23-year high in October. However, they ended the year on a downswing and are expected to fall further throughout 2024.

The FOMC’s actions will certainly play a role in that. The day following each of the three previous rate pauses, the average 30-year fixed-rate mortgage (FRM) rose one basis point (0.01%), declined three basis points (0.03%) and fell eight basis points (0.08%), according to Freddie Mac.

Interest rates typically rise alongside increases to the fed funds rate and decrease after cuts. In its statement, the FOMC described economic activity as “expanding at a solid pace,” moderate but strong job growth, and unemployment as low.

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

“Markets had already priced in a ‘no-change’ from the Fed, but political pressure is mounting on the Federal Reserve to look to cut rates sooner than later. Unless they bend, we believe rates will begin to start to slowly pull back in the second half of this year, with many economists predicting a mortgage-positive outcome from the May meeting,” said A&D Mortgage CEO Max Slyusarchuk.

Should you lock in a mortgage rate?

Volatility is a classic trait of mortgage rates, influenced by multiple economic and political factors.

While nobody can say with 100% certainty, the FOMC’s latest action signals upcoming rate cuts and, in turn, a downward trajectory for interest rates. And although the average 30-year FRM is still high compared to the bottomed-out rates of the pandemic, you can (and should) negotiate your rate down and get creative in budgeting. You also shouldn’t forget that building equity is one of the biggest benefits of homeownership.

If you’re ready to begin your house hunt, reach out to a local mortgage professional to see what rates and loan types you qualify for.