The Federal Reserve Open Market Committee elected to keep rates steady for the third consecutive meeting, but set the stage for three rate cuts in 2024.
The decision to hold rates will maintain the federal funds rate between a target range of 5.25% and 5.5%.
“The pause is telling us that the Federal Reserve believes that the economy is moving in the right direction,” says Zonda chief economist Ali Wolf. “This means that they are tracking that overall economic growth is slowing, but not slow. The hope is that the Fed can pull off a soft landing, but we are far from declaring that [a soft landing is] a done deal.”
In a news release announcing the decision, the Federal Reserve Open Market Committee said “economic activity has slowed from its strong pace in the third quarter.” The Fed says job gains have moderated from earlier in the year but “remain strong” while unemployment remains low. Inflation has eased from its recent highs—the Consumer Price Index rose by 3.1% on an annual basis in November. However, inflation remains elevated above the Fed’s target of 2%.
“Rate cuts can happen for one of two reasons. Reason one is that the Fed has reached a point where the labor market is healthy and inflation is reasonable and they no longer feel the need to be restrictive,” Wolf says. “Reason two is that the economy has slowed down enough that they believe they need to cut rates to stimulate economic growth. The Fed communicated that if they see inflation get back in-line with their target, they could simple lower rates as a result [reason one].”
Wolf says the future decisions of the Fed impact home building directly because of the immediate and medium-term impact on mortgage rates.
“For example, following the announcement today, the 10-year Treasury yield dropped and, by connection, mortgage rates moved lower as well,” Wolf says. “Further, mortgage rates tend to go down before the Fed starts cutting rates, so unless there are other economic shocks to the system, we could see some more downward pressure on rates over the next 12 months.”
