In their June 12 meeting, the Fed held interest rates steady, and projected one rate cut before the end of the year. Markets had expected a projection of two rate cuts after the May CPI report showed inflation continued cooling–but it’s possible Fed officials were unable to fully take the latest inflation data into account for this meeting.
The U.S. Federal Reserve announced they’re holding interest rates steady during their June 12 meeting, as anticipated. But more meaningfully for the economy and the housing market, the Fed also projected just one rate cut before the end of the year, a surprising development given the promising CPI report that came out earlier in the day. They had been expected to cut rates twice.
But Fed Chairman Jerome Powell’s remarks left the door open to more rate cuts, and it’s unclear whether the Fed’s projection fully incorporated this morning’s CPI data. This will cut into the mortgage rate relief we got from the CPI data, but ultimately, the Fed’s policy decisions will be driven by economic data, particularly inflation data, and the latest reading points to lower rates in the second half of 2024.
Fed officials push expectations of rate cuts back, leaving just one for 2024 and up their long run expectations for the neutral rate. When the Fed last issued a summary of economic projections (SEP) on March 20, the median official expected three rate cuts in 2024 by the narrowest possible majority. They were widely expected to pare that back to two today, but instead they brought it all the way down to one, with 11 officials expecting 1 or fewer cuts. They delayed expectations of further cuts, with four each expected in 2025 and 2026. Critically, they also increased their view of where they expect to settle after this cutting cycle is over from 2.6% to 2.8%. Markets have long priced in expectations that this long term neutral rate would increase in a world with higher inflation. A higher neutral rate keeps long term interest rates, such as 30 year fixed mortgage rates, elevated.
However, in his press conference remarks, Powell emphasizes the uncertainty of this projection, seemingly in an attempt to leave the door open for a September and December rate cut. Talking about the SEP, Powell did not linger on the median projection. Instead he said “15 of the 19 [dots] are clustered around 1 or 2 [cuts]. I would look at all of them as plausible.”
Because this morning’s CPI data came during the middle of the Fed’s two-day meeting, it is entirely likely Fed officials were unable to fully take it into account when projecting the path of interest rates. In the modern age of the Federal Reserve, Fed meetings are highly choreographed affairs where the choreography was set weeks ago. When asked if officials had the opportunity to change their projection after the CPI data, Powell said, “some people do, some people don’t. Most people don’t, but you have the ability to do that.” Indeed, the overall tone of Powell’s remarks today seemed designed to take the listener’s attention away from the SEP. At one point, Powell said, “we can’t know what the future holds.”
The Fed’s inflation projection in today’s SEP looks to be already outdated according to this morning’s inflation data. Fed officials are projecting core PCE, their preferred inflation measure, to end 2024 at 2.8% higher than the previous year. With today’s CPI data, it looks likely that core PCE will hit 2.6% YoY (or possibly even 2.5%) for the month of May. When asked about this in the first question of the press conference, Powell ascribed it to a desire to be conservative. Because inflation dropped so quickly in the second half of 2023, there’s a higher bar for inflation to improve in the second half of 2024 (this is also known as “base effects”). But if inflation improves as markets expect, it’s pretty easy to see how the Fed could cut more than they projected in the latter half this year.
Powell continues to argue that the best thing for the housing market is to bring inflation in check so the Fed can eventually cut rates, ignoring the effects of high rates on housing supply. Powell acknowledged the housing shortage as a major contributor to high housing costs, as well as the effect of high rates on the housing shortage by discouraging building. But he did not concede that high rates also worsen the lock-in effect.
What this means for homebuyers and sellers. The Fed’s message was that we will need to continue to wait for rate relief. But this morning’s CPI data was a big step in the right direction.
