As expected, the Fedreal Reserve slowed the rate hikes in 2023 amid cooling inflation data. The Federal Open Market Committee (FOMC) on Wednesday afternoon decided to raise the federal funds rate by 25 basis points to the 4.50%-4.75% range, the highest level in 15 years.
The decision follows four subsequent 75 basis point increases, which occurred in June, July, September and November, and a 50 basis point increase in December. The Fed started to hike rates in March 2022 in order to pull inflation back to the 2% target. However, the Consumer Price Index (CPI) rose by 6.5% in December compared to one year ago, according to the Bureau of Labor Statistics— the latest sign that inflation is cooling. That’s the smallest 12-month increase in the index since the year ending in October 2021.
According to the FOMC, recent indicators point to modest growth in spending and production, robust job gains in recent months, low unemployment rate and elevated inflation.
Impact On Housing Market
Monetary policy observers are already looking ahead to try and understand what the Fed’s next steps may be — and the potential impacts on the housing market. According to Doug Duncan, senior vice president and chief economist at Fannie Mae, the Fed is going to hold the fed funds or sharp rates high until they are convinced they’ve expelled inflation. “But we think that rates will come down — primarily because of a recession,” Duncan said in an interview with HousingWire. Last April, Duncan and his team at Fannie Mae added an expectation to their forecasts of a recession in the first quarter of 2023 due to the Fed’s moves. And, their latest forecast ultimately included a 0.6% decline in the GDP for the year, as a soft landing seems plausible, according to the team.
For the housing market, declining rates mean home prices will continue to decline as more potential borrowers can no longer afford to buy a home. Since consumer debt like credit cards and auto loans will also slightly increase and have a negetive impact on people’s ability to qualify. “Credit card interest rates are already as high as they’ve been in decades,” said Matt Schulz, chief credit analyst at LendingTree. “While the Fed is taking its foot off the gas a bit when it comes to raising rates, credit card APRs almost certainly will keep climbing for at least the next few months, so it is important that cardholders continue to focus on knocking down their debt.” Credit card annual percentage rates are now near 20%, on average, up from 16.3% a year ago, according to Bankrate. At the same time, more cardholders carry debt from month to month while paying sky-high interest charges — “that’s a bad combination,”.