In their May 1 meeting, the Fed held interest rates steady and didn’t take the possibility of rate cuts later this year off the table. For homebuyers, the meeting shouldn’t move the needle on mortgage rates; the more important piece of economic news will be the next inflation report.
The Federal Reserve announced they’re holding interest rates steady during their May 1 meeting, as anticipated. They also confirmed that the lack of progress on inflation in the first quarter means rate cuts are delayed relative to previous projections. The Fed statement and meeting contained virtually no surprises, and shouldn’t move mortgage rates much.
The Fed kept interest rates where they have been since July 2023 and acknowledged the recent lack of progress on inflation. In their statement, the Fed added a sentence saying that “In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.” They also changed “Risks are moving into better balance” to “Risks have moved toward better balance over the past year.”
Powell made it clear that further rate hikes are unlikely. When asked whether the latest inflation data invites the possibility of another rate hike, Fed Chairman Jerome Powell dismissed the possibility, saying that it is “unlikely that the next policy move would be a hike.” At other times, he emphasized that the current interest-rate level has worked to bring inflation down and does not think further restriction is necessary. In one of the more forceful moments of the press conference, he responded to worries about stagflation by saying “I don’t see the stag or the flation.”
Powell also anticipates that, in line with current market expectations, rate cuts are going to come later than previously expected. While Powell believes that rate cuts are likely this year, they will probably start later than previously forecasted and he is not confident on the timing or number without more inflation data. The Fed’s last forecast from March narrowly called for three cuts this year, but since the April 10 inflation report, markets have been pricing in one to two cuts. In today’s press conference, Powell avoided commenting on how many are possible this year. There will be a new set of projections released during the June 12 meeting.
The Fed is slowing down the quantitative tapering (QT) process slightly more than expected. Today’s statement included a change to the monthly redemption cap on Treasuries from $60B to $25B. The Fed has been letting securities that they bought during the pandemic to support the economy roll off its balance sheet. Today, they are reducing how much they are allowing to roll off each month due to concerns about the level of reserves at the Fed. The size of the change today was slightly more than expected and works in the same direction as rate cuts–though the impact is smaller. Powell emphasized that they are not trying to stimulate the economy; they are simply trying to avoid disrupting the financial system by reducing their balance sheet too quickly.
For homebuyers, mortgage rates are unlikely to change much in the near future. This Fed meeting is unlikely to move the needle on mortgage rates. The key to the path of mortgage rates this year and next remains monthly inflation data. The next fresh read on inflation comes May 15.
Written by: Chen Zhao