Federal Open Market Committee Holds Steady

The Federal Reserve’s Open Market Committee (FOMC) chose to forgo the opportunity to raise the central bank’s nominal interest rate at the conclusion of their September meeting, a repeat of the action the committee last took in June. 

The most aggressive series of rate hikes in history ended in June when the committee held off on raising rates due to a litany of positive factors which consisted of 11 straight rate hikes over 15 months. Since the post-pandemic rate hikes began, the FOMC raised rates in March 2022 (+25 points), May 2022 (+50 points), June 2022 (+75 points), August 2022 (+75 points), September (+75 points), November 2022 (+75 points), December 2022 (+50 points), February 2023 (+50 points), March 2023 (+25 points), May 2023 (+25 points), June 2023 (+0 points), and July (+25 points). This is equivalent to a rise of 5.00 percentage points over the last year. 

This string of rate hikes that have occurred since the pandemic has been necessary according to the FOMC to tamp down inflation, which reached a high of 9.1% in June 2022. While inflation has eased, it is still above the committee’s target rate of 2%. 

The target rate now stands at 5.25-5.50%. The committee next convenes on October 31-November 1. 

In a prepared statement released at the end of the meeting, the committee said: 

“Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.” 

“The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.” 

“The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5.25-5.50%. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2% objective.” 

“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.” 

Michele Raneri, VP and Head of U.S. Research and Consulting at TransUnion commented on the action by the Fed upon the announcement of the news: 

“Previously, the Fed had seemingly signaled a commitment to being aggressive, potentially even again raising interest rates multiple times before the end of this year to continue efforts to drive down inflation. While they still very well may follow through with that before the end of this year, this week’s announcement indicates that the Fed may believe that the best course of action, for now, is to continue monitoring the economy, and the effects of previous hikes, to determine if and when additional rate hikes are necessary.” 

“The decision not to raise rates at present will likely have impacts across the credit markets. In the mortgage market, for instance, consumers who have been holding off may begin to be motivated by the announcement to consider making the home purchase they have been waiting on.” 

“Consumers who have credit cards will also likely see some short-term benefits by this announcement. This is because when the Fed announces an interest rate increase, credit card interest rates typically follow shortly thereafter, which may result in larger minimum monthly payments for credit card holders. While the decision not to raise interest rates this time round mitigates that for now, more interest rate increases may be on the horizon. For that reason, it’s a good idea for consumers to continue to maintain balances that are in alignment with what they know they will be able to make payments on each month, and take into consideration the possibility of further interest rate increases and how those payments may change as a result.” 

Danielle Hale, Realtor.com’s Chief Economist also commented on the news: 

“Despite rising energy costs, core inflation readings have continued to improve and while the economy is continuing to add jobs, the pace has slowed. Other labor market indicators, including job openings and the unemployment rate, signal a cooling economy,” Hale said. “Furthermore, the Fed has already tightened policy significantly, bringing the cumulative monetary restriction in the Fed funds rate to 525 basis points or 5.25 percentage points since the March 2022 liftoff.” 

“With market expectations coalescing around the idea of ‘tighter for longer’ monetary policy, the Fed’s updated outlook will be the most-watched outcome of tomorrow’s meeting, as we look for clues about whether another hike will be needed and how long policy will need to remain restrictive. Already, the impact of tighter policy is acutely felt. Mortgage rates have steadied just below recent highs, but remain more than 3 percentage points above their pandemic-era lows. The combined impact of higher rates and higher home prices has driven the cost of financing the typical listed home up more than $400 or 22.5% from a year ago, and up more than $1,100 from August 2020, doubling the cost in three years.” 

“Higher mortgage rates have radically altered homebuyer purchasing power and have been a key factor in existing home sales dropping from a more than 6.5 million unit pace in early 2022 to the roughly 4 million unit pace in recent months. Perhaps more importantly, higher mortgage rates continue to keep existing homeowners sidelined, with as many as 1 in 7 out of the market because they don’t want to borrow at today’s much higher rates, which are in some cases double their existing cost of funds. As a result, I expect the number of homes for sale to decline this year, and this tension to continue to be a damper on the number of homes for sale and thus home sales transactions.” 

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Adriana D. Kugler; Lorie K. Logan; and Christopher J. Waller.