FOMC Holds Rates Steady

Strong economic activity, low unemployment, but elevated inflation has led the Federal Reserve’s Federal Open Market Committee (FOMC) to again forgo a change in the nominal interest rate at the conclusion of their two-day meeting which occurred October 31-November 1. 

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), July (+25 points), and September (+0 points). This is equivalent to a rise of 5.00 percentage points in a little over a 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 for its final meeting of the year on December 13-14. 

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

“Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated.” 

“The U.S. banking system is sound and resilient. Tighter financial and 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 to 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.” 

Danielle Hale, Chief Economist for Realtor.com, shared her insights after the conclusion of the two-day meeting: 

“The Federal Reserve’s Open Market Committee, the rate-setting body that meets roughly eight times per year, is expected to vote to hold the short-term policy rate steady at a range of 5.25 to 5.5 percent. Despite a surge in hiring in September and well above trend economic growth in the third quarter, financial conditions have tightened as longer term rates have increased. The benchmark 10-year treasury yield has risen a whole percentage point since the beginning of the third quarter, even though the Fed raised the Fed Funds rate just once in this period–following its July meeting. A shift in expectations for the policy rate in the September FOMC projections, served to guide market expectations, and an increase in the supply of longer-term Treasury bonds at the same time that the Fed is curtailing its balance sheet catalyzed rates higher. 

“With longer-term rates climbing higher, mortgage rates have followed suit. The widely watched Freddie Mac mortgage rate index hovers just below 8%, a threshold some other mortgage rate trackers have already exceeded. The 23-year high in mortgage rates follows all-time lows reached just three years ago and highlights the effect that financing costs have on the housing market–a particularly rate sensitive sector of the economy. The combined impact of higher rates and higher home prices has driven the cost of financing the typical listed home up more than $256 or 12.4% from a year ago according to Realtor.com September 2023 estimates, and up more than $1,170 from September 2020, doubling the cost in just three years. Meanwhile, Realtor.com data shows that rental listing prices continue to soften, dipping for a fifth month and shifting costs in favor of renting over buying in all but 3 of the 50 largest markets.” 

“The Fed’s primary focus continues to be taming inflation and bringing it back to the 2% target. While we’ve seen solid progress on inflation in the third quarter, monthly readings have trended higher in August and September, and I expect the Fed to keep the option for an additional future rate hike on the table, even if the odds it will need to exercise that option are low. As long as a rate hike is on the table, investors are likely to position cautiously, and the tendency for rates to remain steady to slightly higher remains. ‘Improvement’ in the data–more lukewarm readings on the economy and lower readings on inflation–will be more important drivers of lower rates. Friday’s job report and the Job Openings and Labor Turnover report, due out at 10am November 1, could serve that purpose.” 

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.