Still-High Inflation Postpones May Fed Rate Cut

No Fed hike or cut in May

The Federal Reserve concluded its May meeting by maintaining its status quo.

The central bank now skipped a rate hike six consecutive times. Although not exactly a surprise with the latest inflation readings ticking upwards — and still above the Fed’s long-term target — home buyers pining for a rate cut need to remain patient. As always, the Committee will adjust its policies as necessary based on economic data, outlooks, and risks.

“The FOMC did not change the federal funds target at its May meeting, as incoming data regarding the strength of the economy and stubbornly high inflation have resulted in a shift in the timing of a first rate cut,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association. “We expect mortgage rates to drop later this year, but not as far or as fast as we previously had predicted.”

The Fed’s role and May’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 May meeting, the Federal Open Market Committee (FOMC) held the federal funds target range static for the sixth time in a row. The annual inflation rate grew for the second straight month and remains above the Committee’s goal of 2%. In its post-meeting statement, the FOMC said it “doesn’t expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”

The U.S. annualized inflation rate hit a 41-year high of 9.1% in June 2022 and most recently reached 3.5% in March, according to the U.S. Bureau of Labor Statistics. At the previous meeting in March, Fratantoni (amongst other industry experts) predicted the first cut would come out of June’s meeting. However, that will depend on whether inflation shows signs of sustainable deceleration and less stickiness.

The FOMC will also continue reducing its Treasury securities, mortgage-backed securities and agency debt. Of course, the Committee will continue adjusting its monetary policy actions as appropriate. The next FOMC meeting will take place on June 11-12, 2024.

How will mortgage rates react?

After climbing to a 23-year high in 2023, borrowers haven’t seen the expected decline in interest rates thus far in 2024. However, they are expected to fall throughout the year, with anticipated Fed cuts helping to drive them down.

The day following each of the three previous rate pauses, the average 30-year fixed-rate mortgage (FRM) posted weekly decreases of eight basis points (0.08%) in December 2023, six basis points (0.06%) in January, and then grew by 13 basis points (0.13%) in March, according to Freddie Mac.

Interest rates typically rise alongside increases to the fed funds rate and decrease after cuts. In its statement, the FOMC said economic activity has “expanded at a solid pace,” while job gains remained strong and the unemployment rate low.

Inflation’s “lack of further progress” toward the FOMC’s 2% goal clouds the outlook of when a cut will be ordered.

“Inflation remains stubbornly high, and this trend is convincing markets that rates, including mortgage rates, are going to stay higher for longer. No doubt, this is a headwind for the housing and mortgage markets,” said Fratantoni. “Prospective homebuyers are looking for ways to improve affordability, and switching to an adjustable-rate mortgage (ARM) is one means of doing that, with ARM rates in the mid-6 percent range for loans with an initial fixed period of five years.”

Should you lock in a mortgage rate?

Mortgage rates are volatile by nature, influenced by multiple economic and geopolitical factors.

While outlooks can shift, the FOMC’s latest action signals it needs sustainable improvements to inflation before it makes any rate cuts. 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 and get creative in budgeting. You also shouldn’t forget that building equity is one of the biggest advantages of buying a house.

If you’re ready to begin your path to homeownership, talk to a local mortgage professional to see what rates and loan types you qualify for.