Observers question whether economy has cooled off enough yet
Wednesday’s decision by the Federal Reserve to keep its interest rate unchanged seems to suggest the economy is slowing down to its liking. But that’s something of an open debate judging from reactions to the move by various pundits.
The central bank opted to keep the federal funds rate unchanged at 5.25% -- the second time in a row that it has kept the rate the same after pausing at its last meeting in September.
“There were some weaker economic data that came out, which is all good for us,” Melissa Cohn (pictured left), regional vice president of William Raveis Mortgage, said. The move – or lack thereof – would indicate that “…the economy is starting to slow down and inflation will moderate at a pace that suits the Fed.”
But is the economy slowing down? In an aberrant, inflation-suffused time that has seen the emergence of an inverted yield – an unusual situation marked by lower yields on longer-term bonds than short-term debt instruments – the jury is still out on the question.
Wading through murky economic data
“For now, though, the central bank finds itself in limbo,” Oliver Rust, head of product at independent inflation data aggregator Truflation, said. “It is still wading through murky waters when it comes to economic data and the chairman is clearly wary of pushing rates too high,” he added in reference to Federal Reserve chief Jerome Powell.
“He has been clear about his commitment to balancing a soft landing with bringing down inflation, and this will be top of his mind as the year draws to a close,” Rust said. “However, Powell has also repeatedly acknowledged that inflation is too high and that economic growth will need to slow down to bring CPI closer to the Fed's 2% target, which the FOMC has reiterated it is ‘strongly committed’ to.”
Adding to the confusing mix: The chief economist and senior vice president of the Mortgage Bankers Association, Mike Fratantoni (pictured right), noted that while inflation is slowing down, it’s still not at the 2% level the Fed has tried mightily to achieve with previous rate hikes.
“The FOMC [Federal Open Market Committee] left the federal funds rate target unchanged at the November meeting and did not show any indication of a move at its next meeting in December,” he said in the form of a recap. “Many Fed officials in recent weeks have indicated that rates were high enough now that they could pause. Inflation is slowing, but not yet back to the 2% target range. This is the most important metric the Fed is watching right now.”
Strong economic barometers point to the Fed’s inaction on rates, he suggested: “Even though third-quarter economic growth came in quite strong, and several job market indicators continue to show strength, so long as inflation continues to come down, the Fed is likely to pause at this level for some time. We expect its next move will be a cut in next year’s second quarter.”
Rust echoed these sentiments: “In Q3, US economic growth surprised on the upside, coming in at 4.9% – above analysts’ expectations of 4.7%,” he said. “However, the Q4 number may well reflect the impact of interest rate hikes to a greater extent. Powell is well aware of the time it takes for monetary policy decisions to affect growth and the Fed is likely looking for signs of this slowdown before deciding whether interest rates need to go up one more time.”
The makings of economic drama
All of which is to say that for Fed observers, the stage is now set for some interesting viewing for what’s left of 2023 – already a year to remember from an economic standpoint.
“What will be more interesting to watch is the year’s final FOMC meeting on Dec. 12-13. Currently, the market appears to expect no further hikes in 2023,” Rust noted. “However, the FOMC has highlighted the ongoing strength of the US economy, low unemployment, and ‘elevated’ inflation as ongoing concerns, so some parts of the US economy will have to slow to convince Fed chairman
Jerome Powell that further monetary tightening is not required.”
Fratantoni is also keeping a close eye on future action: “The housing and mortgage markets are at a standstill,” he said. “Mortgage rates near 8%, coupled with a lack of inventory, are impairing affordability, even as new home construction picks up speed. If the Fed does indeed move to cut rates next year and signals its intent to do so, mortgage rates should trend downward. Our forecast calls for this to happen, which would support a somewhat stronger spring housing market.”
To be sure, mixed economic data, coupled with the Fed’s ongoing fight against inflation, will make for interesting watching from the sidelines as the holidays approach. But whether it will be the economic version of “The Nightmare Before Christmas” or “Miracle on 34th Street” is anybody’s guess.
Want to make your inbox flourish with mortgage-focused news content? Get exclusive interviews, breaking news, industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
