On Wednesday, the central bank announced it would maintain the federal funds rate range at 5.25% to 5.5%, where rates have held steady since last July.
The decision was not unexpected and comes as several economic indicators trend in the right direction. Wednesday's inflation report, which showed inflation rose 3.3% over the 12 months ending in May, and the core CPI rose 3.4%, was better than expected. Federal Chair Jerome Powell said that the report builds confidence that inflation is moving toward the 2% target but said more evidence is needed before the central bank begins easing policy.
"So far this year, the data have not given us greater confidence," Powell told reporters during a press conference. "The most recent inflation readings have been more favorable than earlier in the year, however, and there has been modest further progress toward our inflation objective."
"We know that reducing policy restraint too soon or too much could result in a reversal of the progress we have seen on inflation," Powell said. "At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment."
Treading that careful line means interest rates are likely to stay higher for longer, with little chance of a rate cut coming by the end of this summer.
Powell said that while the market will likely see fewer rate cuts this year than initially anticipated, the pace of cuts next year will pick up as long as the economic data supports this path. The Fed's quarterly Summary of Economic Projections shows one rate cut forecasted this year, with the federal funds rate projected to be 3.1% by the end of 2026.
"If the economy remains solid and inflation persists, we are prepared to maintain the current target range for the federal funds rate as long as appropriate," Powell said. "If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we are prepared to respond. Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate."
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Powell said that the best thing the Fed could do for the housing market would be to lower rates. Mortgage rates have risen mainly in sync with interest rates, and an easing in policy would likely help lower borrowing costs. However, even without an interest rate cut, mortgage rates have started to drop already and are expected to continue falling this year, according to the Mortgage Bankers Association (MBA).
"Although May's inflation data came in better than expected, perhaps surprisingly, the FOMC is now projecting only one rate cut in 2024," MBA SVP and Chief Economist Mike Fratantoni said. "However, it is notable that the dot plot indicates it is a close call between one and two cuts. The tight job market – highlighted again in May's employment data – is likely leading many members to continue to be cautious about cutting rates before inflation is consistently lower.
"Today's announcement does not change our forecast for mortgage rates," Fratantoni continued. "We still look for mortgage rates to drop to about 6.5% by the end of 2024."
Higher borrowing costs are just one piece of the affordability challenge house buyers are facing. Powell said that a drop in rates would help to unlock homeowners currently sitting on low mortgage rates, but it would still not solve the inventory crunch pushing home prices up to historically high levels.
"If home prices continue to remain strong, the Fed may look to lower rates later this year to help spur homebuying activity," Victor Kuznetsov, founder of investment firm Imperial Fund said. "Some suggest this could happen as early as September, but if the economy continues on its current trajectory, a rate cut won't come until the end of this year."
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The Fed's commitment to keep rates higher until they get a clear indication that inflation has subsided means consumers will continue to bear the brunt of high borrowing costs for car loans, credit cards and personal loans.
Despite the challenging environment, consumers continue to show an appetite for credit cards. A recent TransUnion report said that in the first quarter of 2024, when counted together, consumers had more than 543 million bank cards in their wallets, an increase of 20 million year over year and more than 88 million from just three years ago. They are also increasingly using their available credit, with balances growing 2.2% over last year. The average new account credit lines rose 3.8% to $5,628.
"Consumers continue to have an appetite for credit, in part to help cope with higher prices of everyday goods," Charlie Wise, SVP and head of global research and consulting at TransUnion said. "Continued elevated interest rates means that the cost of that credit will continue to be higher for longer as well. As a result, it's important that consumers make efforts to use only the credit that they know that they have the capacity to make regular monthly payments on – keeping in mind that minimum payments on the same amount of debt will likely be higher due to elevated interest rates."
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