The Federal Reserve stayed the course, announcing that it would do nothing with interest rates but still plans to begin reducing them sometime this year.
On Wednesday, the central bank announced it would maintain the federal funds rate at 5.25% to 5.5%. Fed officials anticipate at least three rate cuts for 2024, but in a revision from their December projections, they now anticipate one less rate cut in 2025.
The latest inflation data showed that it increased by 3.2% in February as housing inflation and gas prices rose. Fed Chair Jerome Powell said that the central bank will continue to monitor inflation and other economic indicators to determine when to lower rates. Lowering them too soon would bring the risk of bringing inflation back while holding back too long poses a risk to economic growth, Powell explained.
"We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year," Powell said in a statement. "The economic outlook is uncertain, however, and we remain highly attentive to inflation risks. We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate."
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SOCIAL SECURITY: COLA INCREASING BUT MEDICARE COSTS RISING TOO IN 2024
While inflation has been moderating in most parts of the economy, housing inflation remains high. Homebuyers continue to be crowded out of the market by high home prices and mortgage rates. That scenario should improve with lower market rent increases showing up over time, eventually, according to Powell.
Mortgage rates continue to hover between 6.5% and 7%. The Fed will have to dial back interest rates for mortgage borrowing costs to drop significantly. If the economy remains strong, the Fed is likely to hold off on rate reduction until at least June or later, according to CoreLogic Chief Economist Selma Hepp.
"The demand for new home sales will continue to be the bright spot for the mortgage industry as homebuilder confidence continues to grow," Hepp said. "However, we are facing a more anemic than normal spring homebuying season in most major housing markets."
Beyond new home sales, the hope is that a slew of government initiatives recently unveiled by the Biden Administration can extend a lifeline to the ailing housing market. President Joe Biden has called on Congress to invest more than $175 billion in affordable housing initiatives, according to a White House statement.
In his State of the Union address earlier this month, Biden called on Congress to create legislation giving a $10,000 tax credit to first-time homebuyers and those who sell their starter homes. This move would help middle-class Americans cope with higher borrowing costs while incentivizing existing homeowners to sell more homes.
"We are looking to the government to support home buyers through a slate of incentives, namely through a proposed homebuyer tax credit," Max Slyusarchuk, the CEO at A&D Mortgage said. "These are sure to stimulate sales somewhat but won't miraculously turn the industry around. We need the Fed to meaningfully reduce rates for that to happen."
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AMERICANS LIVING PAYCHECK TO PAYCHECK OWN 60% OF CREDIT CARD DEBT: SURVEY
The Fed's decision to keep interest rates higher for longer puts a strain on consumer wallets and how much they pay to borrow, according to Michele Raneri, the vice president of U.S. research and consulting at TransUnion.
According to a recent TransUnion report, credit card balances surged past the $1 trillion mark for the first time in the fourth quarter of 2023. While Americans charged on their cards, they also increased their unsecured personal loan balances in the fourth quarter. Personal origination balances topped $245 billion, compared to $222 billion the previous year.
"While inflation continues to trend towards more normal levels, today's decision from the Fed is to hold interest rates at their current levels and that any potential decreases will take place later in 2024," Raneri said. "This means U.S. consumers who continue to face relatively high-interest rates across a range of credit products will have to wait at least a bit longer for rate relief. When rates do begin falling, the effects throughout the credit industry will be real but will likely be slow to take root."
Once interest rates are reduced, Raneri said consumers can explore refinancing any high-interest debt into lower-interest credit products to reduce balances.
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