The Federal Reserve’s Open Market Committee (FOMC), the rate-setting body that meets roughly eight times per year, left the Federal Funds rate unchanged at its October meeting in a target range of 3.75 to 4.0 percent. This hold follows a 25 basis point hike in September, and was supported by 10 of the 12 voting members. Two voters, Lisa Cook and Beth Hammack, dissented, because they preferred to raise the rate by a quarter percentage point instead of holding.
Even though the Fed left its policy rate unchanged in October, the market is anticipating another 2 to 3 hikes over the next 6 to 8 months which would mean a high-end rate range of 4.5 to 4.75 percent. This is slightly above the high-end of Fed funds rate projections made in September, and would position the Fed funds rate roughly halfway between its December 2025 to September 2026 low of 3.5 to 3.75 percent and its 5.25 to 5.5 percent prior peak. While the market and the Fed both seem to agree that some monetary policy restriction is warranted, most investors currently expect more restriction than the Fed has projected.
Why further rate hikes are expected
Since the September FOMC meeting, when the Fed pushed its rate 25 basis points higher, companies slowed hiring and summer job gains were revised down by 60,000 jobs. The unemployment rate remains relatively stable at 4.2 percent and layoffs are low, but the labor market is less dynamic than is ideal. Meanwhile, inflation surprised to the upside, with the CPI rising 0.6% in September, bringing the annual headline inflation rate to 3.7% as the cost of gas and energy rose sharply. Energy was not the only driver, however, and core CPI, which strips out the cost of food and energy, rose 2.6% in September. Taken together, these indicators suggest that the Fed is likely to continue its focus on inflation, which will likely warrant additional rate hikes.
What this means for housing, and homebuyers and sellers
Investors have made a round-trip in risk pricing since just before the September Fed meeting. The 10-year yield rose from just under 5 percent to more than 5.3 percent before dipping just under 5 percent in recent days, while mortgage rates climbed from just below 7 percent to more than 7.4 percent. Mortgage rates have not dropped back to their mid-September level, and the housing market is feeling the effects. Pending home sales in September dropped to their lowest level on record according to the National Association of Realtors as buyers and sellers have largely disengaged with the housing market for now. In August and September, existing-home sales dropped below a 4 million sales pace, and are likely to remain low through the rest of the year. Home shoppers shopping in this environment can still set themselves up for a better mortgage rate by boosting their credit, making a higher down payment, and, most importantly, shopping around for a mortgage. Those hoping to make a home purchase in the months ahead should plan for further mortgage rate volatility and rate-proof their home shopping budget by testing out a range of possible mortgage rates so they’ll be prepared to react.
